The policy rate is the key lending rate of the central bank in a country. It is a signaling rate which is supposed to serve as a reference cap for all other rates in the economy. A global economic recovery is underway although the variants of the COVID-19 virus weighed in on economic activities in the last quarter of 2020. The continued policy support and the ongoing vaccine roll out efforts have helped boost optimism and investors’ confidence for a stronger rebound in the economic activities in 2021.

Bank of Ghana has kept its policy rate at an eight-year low of 14.50% during March 2021 to continue hedging the economy against the pandemic crisis while it assesses the impact of new tax measures announced this month and higher utility costs on inflation. The Monetary Policy Committee (MPC) of the Bank of Ghana has once again been confronted with difficult decision making, regarding the determination of the policy rate for the next few months as economic conditions are not favourable for the regulator. Increasing the policy rate can incur the wrath of the business committee.

For the sixth consecutive time the committee has maintained the rate of 14.50% over the heightened risk of inflation, ballooning public debt, a depleting fiscal situation and a slow economic growth among others, which have all been exacerbated by the second wave of the COVID-19 pandemic since the beginning of this year. Policymakers noted that the headline inflation rose to 10.90 % in February slightly above the bank’s upper band of the medium-term target band driven mainly by the prices of non-food items. Still, headline inflation is expected to return to the target band in the second quarter of 2021. In the meanwhile high-frequency indicators have continued to pick up reflecting the rebound of economic activities.

Presenting the 2021 budget to the parliament this month, the acting finance minister announced the introduction of six new taxes to help reduce the fiscal gap which topped 13.80% of the GDP in 2020 amid the pandemic crisis. The government expects Ghana’s economy to grow by around 5% in 2021 (Source: Bank of Ghana).

MPC’s hope of seeing the inflation come down was blighted by the rate in February 2020 which saw inflation spiraling to 10.30% from the 9.90% recorded a month earlier.

In its last meeting the MPC said it expects headline inflation to meet the target in the second quarter of 2021, adding that risks to inflation in the near term are broadly contained but short to medium-term risks emanating from the fiscal expansion and rising crude oil prices. This moved the committee to maintain the rate where it is.

However, taking inflation into consideration, the possibility of a cut in the rate is unlikely. With the current fiscal situation, the MPC noted, it is obvious that it will not get any better soon; especially as the pandemic still rages on. The 2021 budget shows the fiscal deficit for 2020 hit 11.70% exceeding the revised target by 30 basis points and it will further worsen as the government still has pandemic-related expenditure to incur. The MPC admitted in its last meeting that the prospects of a sharp fiscal correction in 2021 looks unlikely amid the second wave of the pandemic and it still requires additional spending to provide testing facilities and vaccines.