The Monetary Policy Committee (MPC) of the Bank of Ghana (BoG) has decided to reduce the monetary policy rate by 200 basis points to 18.0 per cent, Dr Ernest Kwamina Yedu Addison, Governor, BoG, has announced.
The decision to reduce the policy rate was made known at a news conference in Accra on Monday after the 81st regular meeting of the Committee in Accra.
According to Dr Addison, the MPC observed that the pace of global growth had firmed up and that although price pressures were picking up, core inflation in most advanced economies remained subdued.
The MPC also noted that Global financing conditions still remained favourable, sustained by relatively low interest rates in most advanced economies and that the outlook for growth, in the near term, was for continued robust expansion towards growth potentials as output gaps gradually closed. These notwithstanding, the Committee noted that downside risks to global growth existed including the abrupt tightening of global financing conditions, escalating trade protectionism and geopolitical tensions.
The MPC also observed that a strong path of fiscal consolidation in 2017 continued in the first quarter of 2018, with the continuation of the allotment system which aligned expenditures to revenues.
The Committee observed that growth prospects for 2018 remained positive and were expected to be supported by crude oil production, gradual recovery in the non-oil sector and favourable business and consumer sentiments.
The Committee noted that the pace of growth in economic activity as reflected by the latest update in the Composite Index of Economic Activity (CIEA) showed some improvements, although still below potential for a number of reasons, including moderated credit growth due to high NPLs, tighter credit conditions and corrections in the balance sheets of the banking sector.
The Committee noted that the disinflation process continued to firm up over the first two months of the year, with significant moderation in price pressures while both headline and core inflation broadly trended down, alongside easing inflation expectations, an indication that the disinflation process remained well-anchored.
According to the MPC, the latest forecast suggested that the medium-term inflation target of 8±2 percent was within the forecast horizon and was on course to meeting the inflation target band.
The Committee noted that the current inflation forecast provided scope for monetary policy to realign interest rates, translate the disinflation gains achieved so far to the market and reinforce the fiscal consolidation process by easing the burden of interest payments on the budget.
Under these circumstances, Dr Addison said, the MPC decided to reduce the monetary policy rate by 200 basis points to 18.0 percent.
Monetary policy is the government’s or Central Bank’s process of managing money supply to achieve specific goals – such as constraining inflation, maintaining an exchange rate, achieving full employment or economic growth.
Monetary Policy is basically the government’s way of controlling the economy by using interest rates and the money supply, while Interest rates are the costs of borrowing money from a bank or the amount of money the bank will give you for keeping your money there.
The government sets the base interest rate with its Central bank and the private banks set theirs at around this rate.
Credit is when one borrows money from someone, typically a bank, and so its price is determined by interest rates
The money supply is the total amount of a currency (the sum of all the £ / $ in circulation).
The aims of monetary policy are mainly to target inflation (the sustained rise in prices in an economy) and maintain low unemployment [although it is impossible to achieve both at the same time.
Inflation can be controlled by changing interest rates and the money supply basically.
Source: Savannanews24/ISD (G.D. Zaney, Esq.)