Home / Business / Exchange rate pressures may push policy rate up—Economist

Exchange rate pressures may push policy rate up—Economist

Pressures from the cedi depreciation could compel the central bank to increase the policy rate by first half of 2019, economist Adu Owusu Sarkodie has projected.

According to him, the demand for dollars in December due to the festive season could have an effect on the exchange rate forcing the Bank of Ghana(BoG) to use the policy rate to correct the misalignment.

The projection follows a forecast by the Economist Intelligence Unit that the Bank of Ghana will tighten the policy rate as a measure to attract investors and also control exchange rate volatilities in the first half of 2019.

The report also said the central bank has to take that measure as the U.S increases its interest rate.

But speaking on the issue, Mr. Adu Sarkodie downplayed the effect of the Feds Rate increase but urged the central bank to focus on the stabilizing the cedi.

“I don’t think that is a strong point that once the U.S Fed has increased the interest rates, then definitely Ghana should follow, other than that investors will run away from Ghana and then go and invest in the U.S. I don’t think that is a strong position to advise the MPC to either increase or change the policy rate,” he argued.

He however pointed out that “a major concern here is the exchange rate. In the first quarter of every year, Ghana’s cedi depreciates because of Christmas and the festive activities. People usually buy on credit and they pay later, so they demand for dollars to pay the goods that they bought on credit in the first quarter it is very likely cause the cedi to depreciate. Anytime the cedi depreciates it also affects inflation”.

Mr. Owusu Sarkodie was of the view that the central bank could anticipate the development and put in the necessary measures to avoid a depreciation.

EIU report

According to the research and business advisory firm, After six interest-rate cuts between the start of 2017 and May 2018, the Bank of Ghana’s ability to ease monetary policy further has diminished.

The report further said Inflation has increased over the course of 2018 toward the upper-end of the official target of 6-10%, following interest rate rises in the United States causing sustained pressure on emerging-market currencies, including the cedi.

The Bank of Ghana after its final Monetary Policy Committee this year decided to keep the policy rate at 17 percent.

However the Economist Intelligence Unit report was of the view that the next move in interest rates is likely to be in an upward direction, particularly if the downward pressure on the cedi intensifies into 2019, owing to ongoing strength in the US dollar.

The report added that even though business groups continue to call for cheaper credit, the BoG may raise rates further in the first-half of 2019 in a bid to dampen inflationary pressures, but the impact will be limited owing to external pressures.

The report maintained that as inflation then moderates in 2020-21, and domestic demand weakens, the door will open for a resumption of monetary easing. This will be followed by renewed tightening in 2022-23, as domestic demand once again strengthens.

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