MPC preview: Tax hikes make rate-hold necessary

Dr Ernest Addison,Governor of the Bank of Ghana

Some experts have expressed confidence that the Bank of Ghana (BoG) will leave its benchmark rate, the policy rate, unchanged to help dampen the inflationary pressures that the new tax policies portend.

The economic analysts told the Daily Graphic in separate interviews yesterday that although a rate cut would be a great booster to growth, the risks to inflation at the moment is of more concern to the central bank.

Consequently, a Researcher with the Institute for Fiscal Studies (IFS), Mr Leslie Dwight Mensah, and an Economic Analyst with Databank Financial Services, Mr Courage Kwesi Boti said they expected the Monetary Policy Committee (MPC) of

BoG to hold the rate at 14.5 per cent, when the bank released a press statement today to communicate the outcome of its meeting.

MPC meeting

The seven-member committee, chaired by the Governor of BoG, Dr Ernest Addison, met between March 17 and March 19 to review economic activities since its last meeting in January, and to set a policy rate to guide monetary operations in the next quarter.

The review meeting came barely a week after the government presented its first full-year budget statement to Parliament since the onslaught of the COVID-19 pandemic in March last year and its re-election in December last year.

Among other things, the budget aims to reduce the fiscal deficit from 11.7 per cent of gross domestic product (GDP) in 2020 to 9.5 per cent of GDP this year, grow the economy by five per cent, slowdown the rate of debt accumulation and expand revenues by almost 34 per cent through a mixture of new tax measures and improved compliance and administration.

The new taxes included a five per cent levy on the gross profits of banks, increments in the value added tax (VAT) and the Energy Sector Levies.


In the preview interview ahead of the MPC decision, Messr Mensah and Boti said the new tax policies had elevated the risk to inflation so high that the bank would have to respond through its benchmark rate.

In addition to the pressure from the tax measures on inflation, Mr Mensah said he expected BoG to adopt a caution approach to government’s intention to rein in the deficit as announced in the budget.

“The fiscal situation at the moment is a risk to the economy and I think the bank will be cautious of that,” the researcher with the fiscal policy institute said.

He explained that the fiscal consolidation efforts announced in the budget were anchored more on revenue increments, with expenditures set to remain strong.

He said that, among other things, meant the budget execution could suffer challenges that would have adverse effects on inflation; hence, the need for the central bank to be cautious.

On growth, he said all indicators showed that the “economy was healing” on its own and a policy rate cut would only be an additional support and not a necessity.

Primary role

Mr Boti said he expected the bank to be more aligned to its traditional role, which was price stability when it announced a rate decision today.

“We need to grow, yes but growth is already taking place. I expect them to be more included to their primary objective, which is price stability.

“Any cut in the rate will run counter to that role and I do not expect them to go that line,” he said.

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