BoG to tighten policy rate further to support the cedi

By Elorm Desewu

The central bank is likely to tighten the policy rate further to maintain cedi stability on the forex market.

According to the Bank of Ghana the cedi may therefore call for continued policy tightness, sustained inflows, and continued mopping up of excess liquidity to dampen foreign exchange demand pressures.

“We expect the Cedi to benefit from continued stabilizing global conditions, strong macro fundamentals and the large foreign exchange inflows at the tail end of the first quarter of 2019. However, risks such as exposure to non-resident portfolio investors, a slowing global economy, and government policies after the exit from the IMF programme require close monitoring” BoG has ssaid.

The cedi came under pressure between April and September, mainly from external developments, but eased towards the end of the year, reflecting stabilizing global conditions, improved inflows, stronger macro fundamentals and observed decline in forex demand pressures. 

During the first quarter of 2019, the Cedi again came under pressure, reflecting FX supply constraints and seasonal demand pressures. The interplay of these factors resulted in a year-to-date depreciation of the Cedi by 8.0 percent at the peak of the crisis on March 19, 2019 compared with 0.02 percent depreciation in the same period of last year.

By the end of March 2018, however, a correction had taken place and the Cedi depreciation had reversed to 5.2 percent. The moderation was on the back of reversal in investor sentiments on the outlook, the successful completion of the IMF-ECF programme and positive news associated with the US$3.0 billion Eurobond inflows, which has improved the country’s reserve buffers.

 On a year-to-date basis, the Cedi depreciated by 6.79 percent in nominal trade weighted terms and 7.39 percent in nominal Forex transactions weighted terms compared to 2.48 percent depreciation in trade weighted terms and 0.35 percent in forex transactions weighted terms over the same period in 2017. 

In real terms, the cedi depreciated by 1.7 , 0.2 , and 3.7 percent, respectively, against the Dollar, Euro, and the Pound Sterling on a year-to-date basis. On year-to-date basis, the Cedi depreciated by 0.71 percent in real trade weighted terms and by 1.59 percent in real forex transaction weighted terms in January 2019.