Ghana’s central bank may have space to cut its benchmark interest rate for a second time in four months as the cedi started to recover from record lows and inflation slowed to the lowest rate in more than four years.
Governor Abdul Nashiru Issahaku has enough room to cut the West African nation’s main rate by as much as 100 basis points, according to Courage Kingsley Martey, an Accra-based economist at Databank Group. Two of the four economists in a Bloomberg survey forecast the central bank will reduce the policy rate from 25.5 percent on Monday.
The central bank reduced its key rate in November for the first time since May 2011 even as inflation remained outside the central bank’s target band of 6 percent to 10 percent since at least January 2013.
While the discovery of 7 billion-cedis ($1.6 billion) in unplanned spending by the previous administration and the government’s and plans to boost spending have startled markets and led to a drop in the cedi’s exchange rate, recent gains in the currency and the slowest economic growth in more than two decades mean Issahaku could reduce borrowing costs, as shown in these three charts.
After weakening more than 7 percent against the dollar last month following the January announcement of previously hidden spending, the cedi has turned around its decline and gained 6.8 percent since March 2 when Finance Minister Ken Ofori-Atta announced plans to cut the fiscal deficit, reduce taxes and increase spending to stimulate the economy.
“Given that this is the first MPC after the budget in which the government has signaled an expansionary fiscal policy, the central bank will be looking at taking an accommodative stance,” Manji Cheto, senior vice president at Teneo Intelligence in London, said by phone. “Inflation is trending downwards and the currency is fairly stable, that basically creates a conducive environment for a rate cut.”
The cedi gained 1.8 percent to 4.2925 per dollar by 2:24 p.m. in the capital, Accra, on Friday.
After accelerating to the fastest rate in more than three years in March 2016, inflation started slowing gradually and the rate declined for the fifth consecutive month to 13.2 percent in February.
“The reduction in prices of petroleum products which as a result of a cut in taxes will slow the inflationary effect on the non food-items,” Martey said by phone in the capital, Accra. “The inflation outlook is further improved by the drop in prices of crude on the international market.”
Gross domestic product in Ghana, the world’s second-largest cocoa producer, probably expanded 3.6 percent last year, according to government estimates, as a shutdown at oil and gas fields and power cuts weighed on the economy. That will be the slowest growth rate since 1994. A cut in interest rates could increase lending to the private sector and boost the economy, Cheto said.
“Any other measure will come as a surprise to people particularly as the Akufo-Addo government has signalled that they want to have a private-sector driven growth,” she said. The current policy rate “is not conducive to lend to the private sector,” she said.