Ghana - Monetary Easing Cycle Set To Continue in 2017


Thursday, August 31, 2017 8:05 AM / BMI

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The Bank of Ghana will continue the monetary easing cycle in 2017 in an effort to stimulate sluggish credit growth. While we had initially only anticipated 150 basis points worth of cuts in 2017, with policymakers facing increasing pressure from the government to ease and inflation set to cool even more rapidly than we expected in the months ahead, we now believe Ghana is set for more significant cuts.

The Bank of Ghana (BoG) looks poised to continue monetary easing in coming months, after having cut by 100 basis points (bps) in May. We had initially anticipated monetary easing in 2017 in the face of continued sluggish private consumption and cooling inflation, forecasting a total of 150bps worth of cuts in 2017.

However, the more dovish bias of the newly appointed central bank governor and rapidly cooling inflationary pressure suggest room for even more substantial easing ahead than we had anticipated. We have thus revised down our forecast for the policy rate at end-2017 to 20.50%, from 22.00%.

Headline Growth Hides Weak Household Consumption

While headline growth looks poised to rebound aggressively in 2017, the BoG's continued concern over weak private consumption will encourage continued monetary easing. The BoG's May 22 monetary policy committee statement highlighted that private sector credit is a key driver of the economic growth, but remained ‘below potential’.

This has been borne out by loan growth figures which in February 2017 (latest available data) was 19.4% y-o-y, recovering from low point of 8.6% in June 2016, but still well below average of 33.4% in 2006 to 2015.

Ghana still has one of the highest policy rates in the world, offering continued headwinds to demand for credit and ensuring the BoG has continued incentive to cut. While we had long anticipated weak private consumption would spur continued easing, a shift in the composition of the central bank board suggests we may see a more prolonged cutting cycle than we initially anticipated.

The May cut was the first policy decision of new governor (appointed on March 31st) and the president highlighted the importance of growth in his statements when he appointed Addison, suggesting he is likely to come under pressure to take a more dovish stance.

Disinflation Picking Up Pace In H217

Similarly price growth looks poised to cool even more rapidly than we had initially anticipated, enabling the BoG to ease more aggressively. Despite a minor uptick in inflation in April 2017 (up to 13.0% y-o-y from 12.8% in March), we expect a broad disinflationary trend will continue, after price growth peaked at 22.6% y-o-y in March 2016. The largest part of CPI basket (44.0%) is food (44.0%).

While the threat of minor increases in food prices will remain in play until H217 as the maize and rice crops come online this will begin to reduce upward pressure on headline inflation from food shortages. Moreover, with the base effects of low oil prices in H116 set to fade in the months ahead, this will further dampen inflation (see 'From Reflation Top Disappointment' April 21). After averaging 17.3% in 2016, we have revised down forecast for the average of inflation in 2017 to 12.0% from 13.0%, on the back of this change.

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