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High inflation to prevent interest rate cut in 2021-EIU

By PrimeNewsGhana
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The Economist Intelligence Unit (EIU), the London-based business intelligence firm, says it does not see any room for the Bank of Ghana (BoG) to reduce the monetary policy rate—which has an effect on the cost of credit—in the rest of the year.

The central bank has kept the policy rate unchanged for 12 months, having reduced it by 150 basis points to 14.5 percent when the pandemic hit the country’s shores in March 2020.

In its April 2021 country report, the EIU said with the BoG struggling to achieve its inflation target of 6–10 percent, a policy rate reduction is unlikely this year. According to the Ghana Statistical Service, consumer price inflation stood at 10.3 percent in both February and March, having climbed from 9.9 percent in January.

“With inflation remaining near the upper bounds of the BoG’s target range (8 percent plus or minus two percentage points) and rising global commodity prices supporting supply-side inflationary pressures, we believe that the BoG will lack the scope for monetary easing.

Although the authorities will remain keen to support access to credit in the context of the ongoing pandemic, the benchmark policy rate is likely to remain on hold in 2021,” the report said.

The organisation further forecast that the BoG will progressively tighten its monetary policy in 2022–25, to 16.5 percent, as inflationary pressures start to pick up, although rates will remain low by historical standards.

“Inflation will remain elevated in 2021, declining only slightly from an annual average of 8.8 percent in 2019 to 8.4 percent in 2021. Although domestic demand is still fairly weak, supply-side price pressures (including rising global commodity prices and supply-chain disruption due to the pandemic) are keeping inflation high.

In 2022 inflation will stay elevated as global commodity prices remain high and domestic demand starts to pick up. Inflation is forecast to average 9.1 percent a year in 2022–25, remaining towards the upper end of the official target range, as weaker supply-side price pressures are offset by strengthening demand and ongoing local-currency depreciation,” the EIU stated.

Commenting on the fortunes of the cedi, which depreciated by 3.9 percent against the dollar last year, the EIU said it expects the local currency to depreciate at a much slower rate this year.

“In 2021 the cedi will depreciate at a slower rate (to an average of GH¢5.84:US$1) owing to improved domestic and global sentiment, as well as narrowing fiscal and current-account deficits. We then expect a slower rate of depreciation through to 2025 (when the cedi will average GH¢6.31:US$1) as monetary tightening supports the currency,” said the EIU.