Bank of Ghana Full text of the Monetary Policy Committee's statement

Ladies and gentlemen, welcome to this MPC press briefing. We have concluded our regular MPC meetings, this being the 71st, and I present to you the Committee’s decision and highlights of the deliberations.

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Ladies and gentlemen, welcome to this MPC press briefing. We have concluded our regular MPC meetings, this being the 71st, and I present to you the Committee’s decision and highlights of the deliberations.

2. The Committee has decided to maintain the policy rate at 26 percent.

3. At the May 2016 MPC meetings, it was noted that headline inflation had declined from 19.2 percent in March to 18.7 percent in April. However, with the 5 percent upward adjustment in the ex-pump prices of petroleum products and its pass-through effect on prices, headline inflation moved up slightly to 18.9 percent in May but has since declined to 18.4 percent in June.

These observed trends in inflation over the first half of 2016 have largely been influenced by increases in the prices of petroleum products, utility tariffs and food prices. Since most of these adjustments are cost push in nature, the current monetary policy stance is deemed appropriate and hence maintained.

4. Core inflation (CPI inflation excluding energy and utility prices) has stabilized in June, indicating some moderation in underlying inflation. The latest consumer sentiment survey, conducted in June, reflects  marginal uptick in inflation expectations based on the unanticipated  increase in petroleum prices and the recurring energy supply challenges.

5. The recent price developments affirmed the Bank’s earlier forecasts that inflation would peak in the first quarter of 2016 and is currently on a gradual descent. To a large extent, the pace of decline in inflation has been reinforced by the current tight monetary policy stance and stability in the local currency.

6. The Bank’s latest inflation forecast suggests a slight outward shift in the forecast horizon as increases in ex-pump prices of petroleum products slowed the pace of expected disinflation. Therefore, headline inflation is likely to move within the medium-term target band of 8±2 percent in the third quarter of 2017, against earlier projections of mid-2017.

7. In the immediate outlook, however, the expected disinflation process over the forecast horizon will remain anchored on monetary and fiscal policy tightness, stability in the local currency and expected slower food price increases with the onset of the harvest season.

There are, however, risks to the inflation outlook. These include the extent to which petroleum product prices, transport costs and utility tariffs are adjusted upwards in the next two-quarters and the potential second round effects from such adjustments on prices.

8. The latest update of the Bank’s Composite Index of Economic Activity (CIEA) reflects some modest pickup in the second quarter of 2016, although at a slower pace than the same period last year. Indicators that accounted for growth in the CIEA were industrial electricity consumption, port activities and domestic VAT collections. Also, the latest consumer survey pointed to positive sentiments about the expected changes in household finances and the economic situation.

9. Growth prospects for the rest of the year would be impacted positively by the stability in the foreign exchange market, continued improvement in consumer and business sentiments, and the realization of additional oil and gas production from the TEN oil fields. However, risks to the growth outlook, such as the tight credit conditions, electricity supply shortfalls and continued fiscal tightness may moderate the pace of economic expansion.

10. The UK’s vote to leave the EU has dominated global developments since the last MPC meeting, and the implications were immediately felt across global currency, commodities and equity markets. Although the sharp depreciation of the pound sterling against major trading currencies has somewhat reversed, the current uncertainties and volatilities in global financial markets may persist until the post-Brexit negotiations commence with the EU.

11. Based on Ghana’s strong relations with both the EU and the UK, the impact of Brexit is likely to transmit through the trade sector, foreign direct investments, budgetary support and the domestic currency market. It is too early to determine the full implications but initial assessments indicate that the local currency appreciated sharply by about 5.7 percent month-on-month against the pound sterling in June 2016, compared with 1.3 per cent depreciation in May, reflecting theBrexit effect. Going forward, the potential fallouts from post-Brexit negotiations will be closely monitored to take the necessary policy actions to dampen any adverse effects on the domestic economy.

12. On the external sector, the relatively low commodity prices and reduced volume of exports impinged on the trade balance in the first half of 2016. The provisional trade deficit over the period widened in comparison to the corresponding period last year.

13. Over the first six months of 2016, volatilities in the foreign exchange market have subsided significantly alongside relative stability in the local currency largely supported by tight policy stance and improved foreign exchange inflows.

14. On the interbank market, the cedi cumulatively depreciated by 3.3 percent against the US dollar in the year to June 2016 compared with 26.1 percent over the same period of 2015. In the outlook, the tight policy stance, inflows from the cocoa pre-export finance facility and expected issuance of the Eurobond in the last quarter would boost reserves, improve liquidity on the foreign exchange market and support the disinflation process over the forecast horizon.

15. In assessing the current economic conditions, the Committee views the risks to inflation and growth as balanced and decided to maintain the policy rate at 26 percent. The Committee remains committed to its price stability mandate and will continue to monitor developments in the economy and take further policy actions, if necessary.

Information Note

The next Monetary Policy Committee (MPC) meeting is scheduled for Friday, September 16, 2016. The meeting will conclude on Monday, September 19, with an announcement of the policy decision.

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