Bank of Ghana
Bank of Ghana
Bank of Ghana
Bank of Ghana

The Bank of Ghana (BoG) has deployed new ammunition to halt the cedi?s destructive fall, which came to 17.6 percent against the dollar in the first quarter of the year.

The central bank?s Monetary Policy Committee (MPC), which met from Monday to Wednesday, refrained from further raising interest rates to prop-up the currency — instead increasing the portion of deposits banks are required to hold as cash in reserves.

?[The] committee decided to maintain the policy rate at 18 percent. However, to address the liquidity overhang and improve supply of foreign exchange in the markets, the cash reserve requirement of banks has been revised upward to 11 percent from 9 percent while the Net Open Position (NOP) limits of banks have been revised downwards,? said Governor Kofi Wampah at the MPC?s press briefing on Wednesday.

The MPC believes excess liquidity within the economy is driving demand for dollars, and wants to rein this in by raising the cash reserve ratio, which will limit the funds available to be lent out by banks.

Increasing the cash reserve ratio is equal to a rate-hike, but its impact is immediate and will be felt quicker, the Governor said. It is also temporary and will be undone when its purpose is served.

The MPC also lowered the single currency NOP of banks — a measure of the difference between their assets and liabilities in a single foreign currency compared to regulatory capital — from 10 percent to 5 percent while the aggregate NOP, a similar but aggregated ratio for all foreign currency exposures of a bank, was reduced from 20 percent to 10 percent.

Both measures are intended to boost supply of foreign exchange and protect banks? balance sheets and earnings from the impact of exchange rate volatility.

Banks will soon be told the time-frame for implementing the policies, Dr. Wampah said. The cedi?s depreciation from January to March was the worst quarterly slide for more than a decade, and beats the 14.6 percent rate of depreciation for the whole of last year.

Its effects have been destructive: inflation is at a four-year high of 14 percent and the prices of critical household needs have been rising relentlessly. Chief among them is petrol, whose price has risen by 25 percent since January.

Asked when real stability will be restored to the cedi to ease the pain of households, Dr. Wampah said he couldn?t give an exact date and that the central bank?s interventions need more time to work fully.
?Their effects will be felt over a longer period. There?s been some reduction in the monthly rate of depreciation, but we?re not satisfied. The government has to do its part.?

He further explained: ?Strict adherence to 2014 budgetary estimates is critical for macroeconomic stability. Reining-in the deficit should therefore be a priority, as this will not only create space for development spending but also reduce borrowing and pressure on interest rates. This will also help to boost international confidence in the economy, encourage capital inflows and facilitate donor disbursements.?

Regarding regulations introduced before the MPC?s last meeting to curb the use of dollars in domestic transactions, Dr. Wampah said the committee will review the directives at its next meeting ?to see whether they have had any unintended adverse effects?.

The MPC also predicted inflation to remain above its target band of 7.5-11.5 percent in 2014, with a likelihood of returning to that range at the end of first-half 2015.

By Leslie Dwight Mensah | B&FT Online | Ghana

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