Asset Management firm, Tesah Capital, says it expects the Monetary Policy Committee of the Central Bank to be more cautious in facilitating further cuts to the monetary policy rate.
Implying that, the Central Bank is very unlikely to see to a further cut in the prime rate.
The assertion by Tesah Capital, is due to its believe that there are substantial risks to inflation in the country.
“Our expectation on inflation is based on rising global inflation expectations, increased domestic money supply, Government of Ghana’s increased appetite for borrowing and a strong rebound in economic activity in Ghana,” noted Tesah Capital.
The Asset Management firm’s stance on inflation risks influencing policy rate changes is due to the positive or direct relationship between inflation and the policy rate.
Inflation and the policy rate share a positive relationship, hence a fall or increase in inflation is expected to result in a fall or increase in the policy rate and vice versa.
The Monetary Policy Committee (MPC) of the Bank of Ghana (BoG), at its 100th MPC press briefing announced a 100 basis points reduction in the policy rate from 14.5 percent in March to 13.5 percent in May 2021.
The decision to decrease the policy rate was attributed to the sharp decline in headline inflation rate.
Headline inflation rate for April 2021 dropped from 10.3% in March 2021 to 8.5%, almost back to pre-pandemic levels and within the medium-term target band of 8+/- 2%.
The decline in the April inflation was driven mainly by lower food prices and base drift effects.
Aside the recorded decline in headline inflation, other factors Tesah Capital believes accounted for the decline in the Bank’s prime rate include;
- Economic recovery gained momentum (Composite Index of Economic Activity 26.8% growth versus -1.9% same period in 2020)
- A decline in private sector credit (annual growth in private sector credit stood at 6.9% compared to a 17.9% growth for the same period 2020)
- Strong performance of the banking sector (Total assets increased by 16.4% y/y to GH¢155.7 billion)
- A significant expansion in reserve money (Reserve money increased by 32% y/y compared to 21.7% y/y for the same period in 2020)
- Dip in both business and consumer sentiments (this is on account of recent increases in petroleum pump prices) §
- GoG is financing its deficit mainly from domestic sources (domestic debt current stands at 37.7% of GDP while external debt represents 32.5% of GDP).
Tesah Capital, is of the view that with a reduction in the policy rate, investments in government securities will reap less returns compared to investments with the private sector.
“For the investor, this decision (reduction in policy rate) suggests a strong consideration to diversify away from Government of Ghana bonds.”
“With a strong rebound in economic activity and the decision to reduce the MPR, investors can look to the private sector for higher rate of returns,” noted Tesah Capital.