BoG to weather dollar storm; Begins 84th MPC meeting today

The Bank of Ghana (BoG) is set to roll out new policy measures to weather the storm of the depreciating cedi as it gauges the health of the economy in the last three months.

In the last few months, global pressures and the withdrawal of some investors from Ghana and other emerging markets has caused the cedi to depreciate by about 6.9 per cent this year, forcing the central bank to step up its supply of United States (US) dollars to meet daily demands for the US dollars.

A source at the central bank hinted the Graphic Business that at the 84th Monetary Policy Committee (MPC) meetings, which begins today, the committee would consider several other options to restore sanity and stability in the currency market.

Among the measures also likely to be considered at the meeting will be a currency swap arrangements with international central banks to cover the projected period for which external shocks are expected to persist.

The cedi, which was trading at GH¢4.42 to the dollar in January this year, is now valued at GH¢4.78 to the dollar at the interbank market but is trading at GH¢4.94 at some forex bureaux in Accra  

But Senior Economist at Databank, Mr Courage Kingsley Martey, said another option available to the BoG was the re-introduction of the 56-Day Open Market Operation (OMO) bill to help tighten the possible excess cedi liquidity in the system.

“This is crucial because while the government aggressively pursue the free senior high school (SHS) programme, the associated expenditure on recurrent items on wages, goods and services as schools reopen can fuel cedi liquidity and undermine exchange rate stability,” he said.

Mopping excess liquidity

“In this situation, you need the central bank to sterilise the situation by mopping up the excess liquidity and holding out of the banking system for a relatively longer period than the regular 14-Day OMO Bill,” Mr Martey added.

The BoG is also expected to tighten oversight of the currency market and clamp down on black market trading of the currency.

This is because the black market activities tend to evade the scope and control of monetary policy, thereby undermining the effectiveness of monetary policy in slowing depreciation.

“The black market also has the potential to grossly exaggerate the cedi's weakness and substantially under-value the currency. So we need the BoG to broaden and tighten regulation of the foreign exchange market,” he said.

Measures to check the activities of forex bureau operators are also expected to be announced to ensure that they operate within well-defined regulatory parameters.

This week’s MPC meeting coincides with a period of elevated uncertainty in the financial market which can potentially spillover into the real sector and trigger price pressures across the economy.

Confidence in local currency

The increasing depreciation of the Ghana cedi continues to undermine confidence in the local currency as a store of value, which does not give room for the MPC to cut the policy rate this month.

“Any cut in the policy rate would further dent the confidence in holding the cedi as a store of value,” Mr Martey said.

Again on the local secondary bonds market, yields have surged to above 19 per cent from about 15 per cent during the first quarter of the year.

“In this kind of environment, a further reduction in the policy rate will create distortions in the prices of financial assets on the domestic market and the policy rate would lose its credibility as a risk-signalling tool,” he added.

Policy rate to remain same

On the currency market, there is a significant weakening of the Ghana cedi in terms of the nominal exchange rate mainly because the US and other less risky economies offer higher interest rates on investments.

On the goods market, the pass-through effect of the cedi's depreciation to domestic prices as inflation for August increased by 30bps to 9.9 per cent.

There are still some upside risks to inflation coming from the prevailing depreciation pressures and higher ex-pump prices for petroleum products.

While the increase in inflation does not warrant an increase in the policy rate, any further reduction in the policy rate can be counter-productive.

Overall and in the light of recent macroeconomic developments, there is more upside risks to inflation in the short term, which requires maintaining the policy rate at 17 per cent.

The MPC is not expected to move the policy rate downwards when an upward movement in the US is creating volatility in the domestic market and threatening to erode the gains the central bank had made.

On the count of recent currency market and inflation uncertainty, monetary policy is constrained and the most optimal decision will be to maintain the rate at the current 17 per cent.