Monetary Policy Committee Press Release November 2015 1. Ladies and gentlemen, you are welcome to the last MPC press bri

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Monetary Policy Committee
Press Release
November 2015
1. Ladies and gentlemen, you are welcome to the last MPC press
briefing
for 2015. We concluded our 67th regular meetings and I present
the
policy decision arrived at and highlights of deliberations that
informed
the decision.
2. The Committee has decided to increase the policy rate from 25 to
26
percent.
3. The latest release by the Ghana Statistical Service (GSS) puts
inflation
at 17.4 percent in October, same as in September and up from
17.3
percent in August. This indicates some moderation in price
movements over the past three months, supported by tight
monetary
policy stance, the appreciation of the exchange rate in July as
well as
falling international crude oil prices.
4. This notwithstanding, the current level of inflation and the
latest
inflation expectations remain far above the medium term target band
of
8±2 percent. Core inflation (CPI inflation excluding energy and
utility
prices), which typifies underlying inflation, has also continued to
rise
over the period. Also, there are imminent upside risks to the
inflation
outlook such as worsening external financial conditions and
the
planned utility tariff adjustments which are now likely to be
higher than
anticipated during the last MPC.

5. On a year-to-date basis, the Ghana cedi depreciated by
15.5
percent as at October 2015 compared with 31.2 percent in the
corresponding period of 2014. Going forward, maintaining a
tight
monetary policy stance will reinforce the relative stability in the
foreign
exchange market and dampen risks related to the external
financial
conditions.
6. Assessments of current economic conditions show that
though
monetary policy remains tight, some additional tightening is
required to
re-anchor the displaced inflation expectations. This, together with
the
on-going fiscal consolidation, is expected to break the high
inflation
inertia. Our current forecasts show that without any additional
policy
adjustment, inflation is likely to drift farther away from the
target band
and lengthen the forecast horizon into late 2017.
7. The Bank’s Real Composite Index of Economic Activity (CIEA)
for
September 2015 indicates a slower pace of growth compared with
the
same period in 2014. However, in the medium term, growth
conditions
are expected to recover, supported by a turnaround in the
energy
situation, increased production of oil and gas and a general
improvement in the macroeconomic environment as inflation
starts
trending down.
8. Fiscal consolidation remains on track. For the first nine
months
of the year the overall budget balance registered a cash deficit of
5.1
percent of GDP which is within the programme target of 5.7
percent.
Maintaining the fiscal consolidation efforts would complement the
tight
monetary policy stance for the attainment of the medium term
inflation
target. This would, in turn, help create conditions for long
term
sustainable growth.
9. Risks from the global environment have heightened, driven
mainly by slower growth prospects in China and other emerging
market economies. Also, commodity prices continue to decline
amidst
tightening financial conditions. These have resulted in
increased
depreciation of currencies ranging from 19 percent to about 48
percent
year-to-date in most commodity exporting countries. The
transmission
of these risks presents clear threats to the balance of
payments
outlook.
10. For the first ten months of 2015, the overall balance of
payments position, as measured by the change in net
international
reserves, worsened to a deficit of US$378 million, compared with
a
surplus of US$181.6 million for the corresponding period of 2014.
At
the end of October 2015, gross foreign assets stood at US$5.7
billion
(3.4 months of imports). The current account balance for the first
nine
months recorded a deficit equivalent to 5.4 percent of GDP.
11. In summary, the Committee noted that overall, the risks to
the
inflation outlook were on the upside, with a likelihood of a
further drift
away from the medium term target, hence its decision on the
monetary
policy rate. The Committee will continue to monitor developments
in
the economy and take appropriate action if necessary, including
the
possibility of lowering the policy rate once inflation expectations
are
well-anchored.
Information Note
The next Monetary Policy Committee (MPC) meeting is scheduled
for
Friday January 22, 2016. The meeting will conclude on Monday
January 25, 2016 with an announcement of the policy decision.
Questions
For this question, refer to the Bank of Ghana’s Monetary Policy
Committee Press
Release of November 2015.
a) Explain the difference between monetary loosening and monetary
tightening.
According to the statement, the MPC increased the monetary policy
rate by 100 basis
points. Does this constitute a monetary loosening or monetary
tightening? Explain.
b) When deciding whether to whether to tighten or loosen monetary
policy, central
banks weigh the relative risks to price stability and growth.
Mention two indicators that
the MPC use to gauge the risk to inflation and two indicators the
MPC use to gauge the
risk to growth.
c) Based on the information in the Press Release, in the thinking
of the MPC did the
risk to growth outweighed the risk to inflation or vice versa?
Refer to specific points
from the press release to back up your argument.
d) Using the money market diagram studied in class, explain the
effect of this policy
measure on the real interest rate.
e) In ordinary language, explain how the reduction in the Monetary
Policy Rate will help
the relative risk identified in part (c) above.
f) There has been concerns among businesses that the recent
reductions in the MPR
has not led to significant decreases in bank lending rates. What do
you think could be
accounting for this? What additional measures can policy-makers
undertake to reduce
the cost of borrowing in the country?
g) In April 2018, the Bank of Ghana introduced a new formula for
calculating
benchmark lending rates by commercial banks, the Ghana Reference
Rate (GRR). How
will the use of the GRR affect the transmission mechanism between
the MPR and
lending rates of commercial banks? Explain with reference to the
100 basis points
reduction in the attached press release.
𝐺𝑅𝑅 = 0.4 ∗ 𝑀𝑃𝑅 + 0.2 ∗ 𝐼𝐵𝑅 + 􁉆
𝑇􁇱𝑏𝑖𝑙𝑙
1 − 𝐶𝑅𝑅 − 𝐶𝐼𝑉
􁉇 ∗ 0.4
Where MPR is the monetary policy rate, IBR is the Interbank
interest rate, T’bill rate
on the 91-day treasury bill, CRR is the cash reserve ratio and CIV
is the cash in vault
ratio.