Overview

The monetary policy committee has commenced the first of its meetings this week, to review the results of the monetary policy stance it took in November, 2015.

In the last press conference, the authority increased the policy rate from 25 percent to 26 percent despite market expectations indicating either a decrease of maintenance of the rate at 25 percent. Chief amongst the reasons provided by the authority was the existence of inflationary pressure which had been persistent for the entire 2015 fiscal year. The November 2015 hike in the monetary policy rate was the last hike in a series of increments from about 21 percent at the beginning of the year. However, the policy pursuit – price stability, yieldedno results, as inflation remained in excess of 17 percent for a better part of the year, with attending effects evinced in the producer price index. At the end of the 2015 fiscal year, inflation stood at 17.7 percent.

What has changed since the last decision?

The authorities anticipated the then pending increments in utility tariffs, taxes and petroleum taxes as conditions which could feed into the prices of goods and services (basket of cpi), which warranted the increment in the rate. Since the decision, these hikes have come to see the light of day with petroleum taxes and levies being increased by a cumulative 33 percent (according to estimates by the Africa Centre for Energy Policy), utility tariffs increased to a maximum of 67 percent for water and 59 percent for electricity, and an increase in various taxes under the new tax law (Act 896). Again the demand pressure usually associated with the yuletide was also observed in the last quarter, albeit at levels lower than anticipated. The Ghanaian Cedi, also remained relatively stable during the period, although it has lost some value against its major trading partners in the first two weeks of 2016. With deliberate strategies instituted to slow down the growth of money supply in the last quarter of 2015, the perceived gains of decline in money supply (inflation included – when it is caused by demand side pressures), should have kicked in by the beginning of 2016. Since the last policy rate decision, the FED in the US increased its interest rate for the first time since the meltdown in 2007/08, a condition which is expected to drain capital from the global financial system back into the US. This could have a telling effect on the monetary policy stance transient the value of the Cedi, as the FED is expected to gradually increase the interest rate in a bid to smoothen the gains from growth the US economy has realized in the last couple of years.

Analysis of these developments

The Ghanaian monetary policy authority was right in its prediction of the possible pass through effects of tariff hikes, petroleum taxes, and increases in tax in accordance with the new tax law. The authority however failed to recognize that these factors influenced the cost of production, thus driving prices up through supply side dynamics, with which monetary policy hikes given the structure of the economy, was not going to deliver the intended results. Indeed a closer look at the trends and composition of the CPI in terms of the food, nonfood, and core (making adjustments for energy and utility prices) components shows this. This occurred for most part of 2015. The situation is further confounded if one considers the fact that the transmission mechanism from the policy rate to the various interest rate indicators and inflation (price transmission mechanism) has been non-existent, and weak at best. Attempts to restore the mechanism via policy directives has yielded limited results, and by implication, any further hikes will not deliver the results of price decline (not stability). The ineffectiveness of the mechanism, has created a situation where the policy rate is now in excess of about 500 basis points in excess of the treasury bill rates, and indeed just about the same rate for most base rates of the commercial banks – ‘who’ are supposed to index their base rates and lending rates to the policy rate. Deductively, the authorities have little to show in terms of results for the last four policy stance they have chosen.

With inflationary pressures still persistent, and gradual adjustment of the economy to the recent hikes in utility, petroleum and income taxes, together with the extraneous challenges the economy will face in 2016, it is likely that the monetary policy authority will in its next decision increase or maintain the policy stance. However, the recent antecedents in its decisions will suggest that this will be less desirable as it will not deliver the results the authorities will be pursuing. At this point the monetary authority has to balance the objective of growth recovery against price stability and given the inability of the recent hikes to aggressively ‘catch’ inflation, it will be prudent to change course and support growth recovery. This will require a decline in the monetary policy rate! Will this be counterproductive? The correlation between the policy rate and other indicators as mentioned is loose, which could suggest less devastating results as will be predicted. Given that policies are evaluated by their outcomes and not their objectives, the entire economy earnestly awaits this decision and the possible results it will deliver by the end of the first quarter of 2016.

**The authors of this article; Philip Nanfuri and Patrick Stephenson are Economic Analysts with AFRINVESTLLC – A frontier markets advisory firm. Contact on info@afrinvestllc.com/ Patrick.stephenson@afrinvestllc.com