According to the Africa strategist at Absa Capital, Ridle Markus, the decision to maintain the rate runs contrary to their expectation for a 100 basis points cut.

The Governor of the Bank of Ghana, Dr. Ernest Addison, addressing the media on Monday, January 22, 2018 stressed that the decision is to tame inflation.

But in an analysis of the policy rate announcement, Absa Capital argued that, “the surprisingly cautious stance by policymakers was on the back of what they believe were emerging pressures in underlying inflation during the final months of 2017.”

Notwithstanding, we believe that with inflation on a firm downtrend, further policy easing is likely this year.

Bank of Ghana (BoG) MPC kept its policy rate unchanged at 20.00% at the conclusion of its meeting earlier today.

The MPC observed underlying inflationary pressures emerging during the last two months of 2017 and hence, to ensure the target of 8% +/-2pp is achieved, it opted for a cautious stance in contrast with our expectation for a 100bp cut.

Food and oil price pressures present a risk to the inflation outlook.

The MPC statement highlights the rise in food and oil prices that had pushed Ghana’s headline inflation from 11.6% y/y in October to 11.8% at December 2017. As a result, the bank’s core inflation rose from 12.3% y/y to 12.6% over the same period. Nonetheless, the bank’s weighted inflation expectations by business, consumers and the financial sector declined in December.

The statement further looked at some of the indicators from its Summary of Economics and Financial Data release for January 2018, which shows brisk economic growth, a decline in the total debt ratio and stronger external balances. Private sector credit extension (PSCE) has improved, rising by 12.8% y/y in December 2017 after bottoming at 6.5% in August. This follows the cumulative 550bp cut in policy rates in 2017.

Despite today’s unexpected rate decision, we expect further policy easing in the year ahead.

Our projections indicate that, despite near-term pressures from food and international oil prices, headline inflation may ease further to dip into single digits by H2 18, creating room for further policy easing.

While we do not expect policy easing to be as aggressive as last year, a maximum reduction of 400bp remains possible. That said, with inflation expected to edge marginally higher up to March, the MPC may maintain this cautious stance at the March meeting, delaying the resumption of rate cuts possibly to May 2018.

Credit growth is recovering after policy rate cuts in 2017

Further policy easing expected in 2018

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Credit: Absa Capital

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