Ghana’s Room for Rate Cuts Grows as IMF Reforms Reduce Yields

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Bank of Ghana Governor Kofi Wampah
Bank of Ghana Governor Kofi Wampah will announce the monetary policy committee’s interest-rate decision at 11 a.m. Photographer: Kiyoshi Ota/Bloomberg

Prospects of slowing inflation may pave the way for Ghana to cut interest rates from an 11-year high in the third quarter, in what would be the first reduction in almost four years.

While all eight analysts surveyed by Bloomberg predict the policy rate will be maintained at 21 percent on Wednesday, reforms outlined in a $918 million aid deal signed with the International Monetary Fund in April may ease pressure on the cedi and consumer prices. Treasury-bill yields have dropped for 12 straight weekly auctions, falling 81 basis points in the period to 25.04 percent on May 8, the lowest since Aug. 22.

“If the government sticks to the fiscal consolidation plan of the IMF, that will help ease pressure on the currency, which will help inflation,” Ridle Markus, Johannesburg-based Africa strategist at Barclays Plc’s African unit, said by phone on May 11. That would “pave the way for a rate cut somewhere in the third quarter,” he said.

The IMF agreed to lend Ghana cash in a three-year program that includes targets for curbing public wages and narrowing the budget deficit from last year’s gap of 9.3 percent of gross domestic product. West Africa’s second-biggest economy is battling 24-hour power blackouts, has the continent’s worst-performing currency in 2015 and is growing at the slowest pace in two decades.

Off-On

The cedi retreated 17 percent this year against the dollar and was unchanged at 3.89 per dollar by 7:44 a.m. in Accra. Yields on $1 billion of debt due January 2026 have climbed 65 basis points, or 0.65 percentage point, since they were sold four months ago to 8.84 percent.

While the IMF aid boosted Ghana’s foreign currency and gave guidelines for stabilizing the economy, the country is battling power cuts that intensified into regular blackouts after a ship damaged a pipeline off Togo’s coast that transports natural gas from Nigeria to Ghanaian power plants in August 2012.

Nicknamed “dumsor,” which means off-on in the local Twi language, the shortages have led to job cuts and street protests and prompted the John Dramani Mahama-led government to lower its forecast for 2015 growth to 3.9 percent from 4 percent a year earlier.

‘Too Risky’

“The government hasn’t got a hold on the economy,” John Ofosu Awuku, who oversees 420 million cedis ($130 million) in pension and corporate funds as head of NDK Asset Management Ltd., said in an interview in Accra on May 11. “The energy crisis is affecting a lot of companies.”

NDK has shunned debt maturing in more than a year, buying only three-, six- and 12-month Treasury bills, he said. “The future is uncertain,” Awuku said. “Longer-dated bonds are much too risky to get into.”

Bank of Ghana Governor Kofi Wampah will announce the monetary policy committee’s interest-rate decision at 11 a.m. He didn’t answer two calls made to his mobile phone on Tuesday.

Even as inflation accelerated to 16.6 percent in March, the highest since December and outside the Bank of Ghana’s target of 2 percentage points above or below 8 percent, the IMF sees it slowing to an average 12.2 percent this year and 10.2 percent in 2016.

While it’s too soon to see the effects of IMF reforms on the economy, stability in domestic markets and the arrival later in the year of a power ship to boost output and lower costs for businesses should ease inflation and give the central bank room to reduce rates, said Doris Yaa Aggrey Ahiati, head of research at Databank Financial Services Ltd.

“The environment is not conducive to price growth,” she said in an interview on May 11. “The only direction we see the policy rate going is down.”

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