The Monetary Policy Committee of the Bank of Ghana has kept its policy rate unchanged at 14.5 per cent, citing pressures from rising crude oil prices and direct and secondary price effects of the revenue measures announced in the 2021 budget.
“Risks to inflation in the near-term are broadly balanced, but there are emerging short-term pressures emanating from the rising crude oil prices and the direct and secondary price effects of the revenue measures announced in the 2021 budget. Monetary policy would need to remain vigilant to monitor these risks,” the Bank of Ghana said in a statement after a meeting of the Committee. The statement said the global economic recovery was underway although new variants of the COVID-19 virus weighed in on economic activity in the last quarter of 2020.
It said global financing conditions remained benign as major central banks reaffirmed the continuation of their asset purchase programmes, providing continued policy support and improved prospects about the global economy due to ongoing vaccination efforts, and the large fiscal stimulus in the United States.
It said the sustained policy support to moderate the impact of the pandemic and the massive rollout of the COVID-19 vaccination programme in advanced economies have significantly improved global growth prospects for 2021 and the medium-term outlook.
The statement said with the improved outlook, commodity markets, especially crude oil prices, were gradually turning around and cost pressures had begun to emerge due to resurgence in demand coupled with temporary supply constraints. However, inflation remains generally subdued due to the sizeable spare capacity and labour market slack in advanced economies.
It said near-term global financing conditions remained favourable and likely to benefit currencies in emerging market and frontier economies, including Ghana. The strong fiscal stimulus in the United States could trigger a rise in bond yields, leading to potential capital flow reversals from emerging markets. However, the Committee is of the view that the Fed’s indication to keep interest rates at low levels will support favourable financing conditions in the near term.
On the domestic front, the Bank’s high frequency indicators have continued to pick up, reflecting the rebound in economic activity. Although business and consumer sentiments softened on the back of the surge in COVID cases in the early months of 2021, the rollout of the vaccination programme has increased optimism about the future and will further add a boost to the anticipated recovery in growth.
Even though private sector credit growth remains generally weak due to the pandemic, the rebound of input supplies evidenced by increased non-oil imports should support the ongoing rebound in economic activity. It said the banking sector remained well-positioned to continue with the core objective of financial intermediation to support the ongoing recovery process.
“Banks are projected to sustain the strong performance under mild to moderate stress conditions. While some of the regulatory reliefs extended to the industry have helped banks’ continued support of the real sector, close monitoring and heightened supervision will be required to address potential vulnerabilities in the industry, as the pandemic lingers,” it said.
The statement said the 2021 budget has set fiscal policy on an adjustment path albeit slower than originally anticipated. The adjustment for 2021 is expected to be driven, mainly by revenue-enhancing measures, and to a lesser extent, expenditure rationalization due to the need to continue the stimulus programmes.
It said after declining in January 2021, headline inflation rose in February slightly above the upper band of the medium-term target, driven mainly by non-food prices. The Bank’s forecast, however, remained broadly unchanged with headline inflation expected to return to the target band in the second quarter of 2021.
It said the policy would need to remain vigilant to monitor these risks. The next MPC meeting is scheduled for May 19 – 21, 2021.