1. A review of the latest economic data and information that have become available since the last MPC meeting suggest that inflationary pressures continued to be subdued, and the cedi exchange rate was relatively stable, underpinned by a significant improvement in the fiscal and external payments positions. Domestic demand and economic activity have also been strong and the prospect is for a higher GDP growth than initially forecast for 2004.

2. Headline inflation, measured by the year-on-year increase in the overall consumer price index rose from 11.9 percent at the end of June to within a narrow range of 12.4 percent and 12.9 percent in the third quarter and above the desired single-digit threshold. Headline inflation declined marginally from 12.9 percent in August, to 12.6 percent by September 2004, driven by a combination of improved food supply conditions and slower increase in non-food prices.

3. The third quarter price data indicates that the economy has not experienced the sharp seasonal food price decline associated with the third quarter. While food prices declined by 3.8 percent in the third quarter of 2003, they fell by only 0.4 percent over the same period in 2004. But non-food prices have continued to decline from 10.4 percent at the end of July to 5.3 percent by the end of September 2004. The current rate of non-food inflation is the lowest recorded in the last several years. The Bank of Ghana?s measures of core inflation continue to indicate that underlying price pressures are subdued.

4. Evidence from the real sector indicates that the pace of economic activity picked up and confidence in the economy from businesses and consumers has remained high. The Bank of Ghana?s Composite Indicator of Economic Activity (CIEA) rose by 8.7% in the third quarter of 2004, compared to 4.5 percent in the second quarter of 2004. The Bank of Ghana Surveys of Business and Consumer Confidence also indicates that businesses and consumers continue to show optimism in the economic outlook. The Ghana Stock Exchange also continues to record impressive growth even though the monthly gains in the GSE all-share index slowed in the third quarter as investors awaited new Initial Public Offerings (IPOs). The developments in the real sector indicate that real GDP growth for 2004 is likely to be above the 5.2 percent projected at the beginning of the year.

5. The Commercial Banks and other financial institutions appear to be shifting their lending portfolio in favour of the private sector. The annual growth of credit to the private and public enterprises from domestic money banks at the end of September 2004 was 41.3 percent compared with 12.5 percent during the same period in 2003. Growth of credit to the private sector in real terms also rose from 3.0 percent in August 2003 to 18.0 percent by August 2004. About 67.0 percent of the credit went to the private sector. The increase in credit to the private sector was broad-based, with the major recipients as manufacturing, import trade, construction, services and miscellaneous. The manufacturing sector received the highest share (20.0 percent) of outstanding credit at the end of September 2004, followed by commerce and finance (19.7 percent).

6. The banking sector shows a generally robust earnings and a profitable and fairly liquid position, with a better risk outlook. Non-performing loans of the banking sector have declined further from 18.5 percent in September 2003 to 16.4 percent at the end of September 2004. The non-bank financial sector (including Savings and Loans Companies, discount houses, finance companies, leasing companies and venture capital companies) have seen their assets grow to some ?1,450 billion (2.0 percent of GDP) an increase of(at 27.0 percent over the last year). However, there was an overall decline in liquidity during the third quarter of 2004 driven by declining liquid asset ratios of venture capital funds, savings and loans companies and finance houses. The discount houses continue to have satisfactory liquidity positions.

7. Fiscal developments for the ten months of the year indicate a continued process of consolidation of public finances on the path of deficit and domestic-debt reductions, which is an important source of the relatively stable macroeconomic environment.

? Total Revenue and Grants for the first three quarters of 2004 amounted to ?15,870 billion. Grants (including HIPC Assistance of ?740 billion from multilateral donors) amounted to ?2792 billion. Tax revenue for January-September 2004 amounted to ?12,107 billion, above the budgeted estimate of ?11,616 billion while non-tax revenue amounted to ?825 billion (above the budgeted estimate of ?691 billion).

Total expenditure for the first three quarters of the year was ?16,640 billion, above the budgeted level of ?16,152 billion. This includes HIPC financed expenditure of ?1,122 billion (compared to a budgeted third quarter level of ?769 billion), subsidy to the Tema Oil Refinery of ?805 billion and personal emoluments of ?4,959 billion. Personal emoluments, i.e. wages and salaries, are marginally below the third quarter budget ceiling of ?4,966 billion.

? Capital expenditure totalled ?4896 billion, of which ?3724 billion was foreign financed. With these developments the budget recorded a domestic primary surplus of 0.30 percent of GDP compared with a budgeted surplus of 0.70 percent of GDP through the third quarter 2004. This entailed a net domestic financing of the budget to the tune of ?48.0 billion by September 2004, a significant reduction for the June 2004 level of ?1431 billion. However, resource inflows in October, along with moderated expenditure resulted in a net domestic repayment of ?442.0 billion as at November 5, 2004.

8. Year-on-year reserve money growth increased from 35.0 percent in September 2003 to 37.0 percent by September 2004. Broad money (M2+) growth increased from 35.0 percent in September 2003 to 41.5 percent by September 2004. The growth in the monetary aggregates have been driven by increased accumulation of net foreign assets by the banking system as well as increased demand for real money balances as economic activity has picked up in the cocoa and other sectors.

9. Interest rates on the money markets remained relatively stable during the third quarter of 2004. However the introduction of the 28-day and 56-day Bank of Ghana bills and the medium term Government securities in September has seen some realignments of interest rates at the short and long ends of the market around the Bank of Ghana Prime rate. The new medium-term Government of Ghana instruments accounted for some 4.1 percent of the market.

? The benchmark 91-day Treasury bill rate increased from 16.92 per cent in July 2004 to 17.06 percent by October 2004.

? Interbank money market rates inched up from 15.4 per cent in July 2004 to 16.0 percent by October 2004.

? The two-year fixed and floating as well as the three year fixed and floating bonds have interest rates between 20.0 and 21.50 percent.

? Commercial bank base rates have remained in the 25.0 percent band since July 2004.

10. Provisional balance of payments figures show merchandise trade recorded a deficit of $1,152 million in the first three quarters of 2004, driven by a strong growth in imports. Over the same period in 2003, the merchandise trade recorded a deficit of $575.0 million. ? Merchandise imports increased from $2,366 million in September 2003 to $3,166 million by September 2004 (an increase of 34.0 percent). The relatively strong growth in capital and intermediate goods imports accounted for some 75.0 percent of the increase in imports. Oil imports rose from $440 million to $568.0 over the same period, driven by higher international crude oil prices.

? Merchandise exports on the other hand increased from $1790 million in September 2003 to $2014 million by September 2004 (a 12.5 percent increase). The increase in exports was helped by cocoa, which increased by 78.0 percent in volume terms. Cumulative purchases of cocoa through September 2004 amounted to some 736,000 tonnes, or a 48.0 percent increase over the same period last year. Cocoa beans exports increased to $825.5 million (a 46.0 percent increase) over the September 2003 levels. Gold exports also held firm, recording an amount of $620.5 million (an increase of 4.5 percent) over the September 2003 level on account of higher prices.

? Notwithstanding these developments, the current account (including official transfers) registered a surplus of $217 million as a result of net services and private transfers which registered year on year growth rates of 96.5 percent and 51.5 percent respectively. The current account surplus was 51.0 percent higher than the September 2003 level and underlies an improving external payments position.

? Private inward remittances ? transfers received from NGOs, religious groups, individuals etc. ? channelled through the banks and finance companies amounted to $1,746 million for the first nine months of the year, which represents a 29.0 percent increase over the same period in 2003.

? Gross International Reserves, reached a level of $1,517 million or the equivalent of 3.5 months import cover at the end of October 2004 and represents a 33.0 percent increase over the same period in 2003. The last quarter of the year is expected to record further increases in gross international reserves as a result in part of the seasonal inflows related to cocoa exports.

11. The cedi exchange rate has continued to remain relatively stable. For the period January to October 2004, the cedi depreciated by 2.3 percent, 7.7 percent and 5.4 percent against the US dollar, pound sterling and euro respectively. For the same period in 2003, the depreciation of the cedi against the US dollar, the British Pound and Euro was 3.8, 9.9 and 18.9 percent respectively.

12. The trade-weighted real effective exchange rate for the cedi shows a real appreciation of the cedi by 6.50 percent between January and September 2004. This compares with a real depreciation of 5.6 percent over the same period in 2003.

13. The foreign exchange market continues to grow in depth and liquidity. Purchases and sales of foreign exchange by banks and forex bureau in the period January-September 2004 amounted to $3,081 million, an increase of 44.0 percent over the same period in 2003. Transactions by banks alone amounted to $2,687 million, an increase of 49.0 percent over the same period last year.

14. Looking ahead, the economy will end the year with strong and improved fundamentals with low and stable inflationary and exchange rate expectations and improved growth prospects. The risk in the outlook is associated with the global uncertainty surrounding the course of crude oil prices which would need to be managed in a deregulated domestic market to achieve a balance in its impact on the budget, domestic costs and prices. The 2005 Government Budget will need to be appropriately positioned in a continued policy of fiscal consolidation supported by prudent price and wage setting behaviour in the economy to underpin stability.

15. Given the balance of risks in the economic outlook and for inflation, the Monetary Policy Committee has decided to maintain the Bank of Ghana Prime Rate at 18.5 percent.