The central bank's Monetary Policy Committee (MPC) met last week to review developments in the economy since the last MPC meeting to enable the MPC appropriately position the benchmark policy rate going forward. Ghanaian authorities have been committed to a monetary policy easing cycle in the last two years to reduce interest rates in a bid to boost credit to the private sector to drive economic growth. However, the impact of ongoing global events on the local economy, most notably Fed rate hikes, is likely to disrupt the pace of the policy easing cycle for the rest of 2018. Fed rate hikes have pilled pressure on the GHS, resulting in inflationary pressures that are likely to be of concern to the MPC as they make their decision, which we expect to maintain the benchmark policy rate 17.0%.
The Bank of Ghana's key measure of economic activity, the Composite Index of Economic Activity (CIEA), grew lower at 8.6% for the first 5-months of 2018 compared to 10.0% growth in the same period last year. This is line with our expectations that while economic growth would remain robust in 2018, it would come in below the 8.4% growth recorded in 2017 on the back of our expectation that growth from new oil wells would begin to normalize in 2018.
The authorities are also facing inflationary pressures from the impact of recent Fed rate hikes and expectations of further Fed rate hikes in 2018 on the local currency. Emerging market portfolio investors have not only reduced their investments into the economy, but some of them are also exiting as they aim to increase their exposure to the US market to benefit from the Fed rate hikes. This has put significant pressure on the local currency despite Ghana's gross international reserves of US$7.29bn, which is equivalent to 3.9 months of import cover. Consequently, the Ghana Cedi has weakened against the major trading currencies in 2018. The GHS has depreciated against the US$ and EUR by 5.8% and 3.5% respectively so far in 2018.
The weakening of the GHS has translated into imported inflation since the last MPC meeting. Ghana's inflation rose for two consecutive months since the last meeting from 9.6% in April to 9.8% in May and 10.0% in June. The GHS has continued to weaken, and as such we expect inflation to continue to rise in July as importers continue to increase the prices of imported goods and services and oil marketing companies increase pump fuel prices.
Ghana's inflation targeting monetary regime dictates that the MPC should increase the policy rate to rein in inflation expectations under the current circumstance, but this is unlikely to happen. We think that increasing the policy rate could setback the government's achievement in slightly reducing lending rates as banks are quick to react to rate hikes, but slow to react to rate decreases. We believe that this is an opportunity for the MPC to seize the moment to affirm their commitment to the ongoing policy easing cycle by maintaining the policy rate at 17.0% while implementing measures to turnaround the situation by the next MPC meeting in September 2018.
