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Monetary Policy Report

Bank of Ghana

Monetary and Financial Developments

Volume 3: No 1/2012
1.0 Introduction:

The economy performed well in 2011 and inflation expectations remained subdued, culminating in a 100bps reduction in the Monetary Policy Rate (MPR) during the year. Real GDP growth, boosted by debut commercial oil production, is estimated at 13.6% (or 8% excluding oil, better than the expected non-oil growth of 7.5%). Inflation at 8.58% was lower than the target of 9% while growth of key monetary aggregates remained in line with expectation, with strong credit growth in support of the real sector. Reflecting the easing of inflation expectations and cuts in the MPR, interest rates generally trended downward across the spectrum of the yield curve. However, there was some shortening of the maturity profile of government securities in Q4 2011 with an incipient firming up of inflation expectations as the year closed. On the capital market, the GSE generally witnessed bearish conditions in 2011, reflected mainly in significant declines in prices of the financial stocks. However, the significant declines in share prices during 2011 juxtaposed against the generally stable macroeconomic environment appeared to have set a positive outlook for the bourse in 2012. Going forward, the 2012 budget notes that monetary policy in the medium-term will focus on maintaining low inflation while responding to any volatility in the foreign exchange market. The Bank of Ghana is expected in this regard, to continue to deploy its instruments within the inflation targeting framework aimed at preserving the gains of macroeconomic stabilization. In particular, the Bank aims at keeping inflation broadly stable with the central point of the target band moderately reduced to 8.7 per cent in 2012 and will thus stand ready to adjust its policy rate in support of this target depending on the risks to inflation. At its February 2012 meeting, the Monetary Policy Committee (MPC) raised the MPR by 100bps citing elevated upside risks to inflation , mainly from a possible contagion from the continued Eurozone debt crisis, fiscal pressures and the unusual upward volatility in the foreign exchange market observed in January 2012.

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February 2012

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2.0

Review of Developments in Monetary Aggregates

Money Supply
After surging in the first half of 2011, growth of the key monetary aggregates broadly eased downward in H2, underpinned by a slowdown in the pace of accumulation of Net Foreign Assets in line with the revised monetary program.

Annual growth of broad money supply, including foreign currency deposits

per cent

(M2+), after surging to 40.2 per cent in June 2011 broadly eased downward to 33.2 per cent in December 2011 mainly supported by Net Domestic assets (NDA) of the banking system. This compares with 33.8 per cent at endDecember 2010. This development reflected among others, a stronger than expected private sector credit growth and increased banking sector net claims on government (Table 1).
In line with the revised monetary

45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0

Chart 1: Annual M2+ growth and its sources (% contributions)

40.2 33.8 25.5 33.2

m2+ nfa nda

Dec-09

Dec-10

Table 1: Sources of Grow th in Total Liquidity (M2+) (m illions of Ghana cedis unless otherw ise stated) Dec-09 Dec-10 Jun-11 Dec-11 Net Foreign Asset Net Domestic Asset ow : Claims on government (net) BOG OMO Sterilisation Acc. Total Liquidity (M2+) Broad Money Supply (M2) o/w Currency w ith non-bank puclic Total Deposits 3933 6278 3676 -607 10211 7550 2082 8129 5754 7909 4249 -935 13663 10935 2927 10736 6792 8410 4120 -847 15202 11533 2786 12416 7880 10315 5181 -437 18195 14241 3763 14432

Change from previous year (in per cent) Net Foreign Asset 79.9 46.3 Net Domestic Asset ow : Claims on government (net) Claims on Private sector( Incl. PE's) BOG OMO Sterilisation Acc. Total Liquidity (M2+) Broad Money Supply (M2) Narrow Money Supply (M1) o/w : Currency outside banks Total Deposits 5.5 53.3 18.2 -175.4 25.5 21.9 12.1 20.3 26.9 26.0 15.6 20.1 -53.9 33.8 44.8 54.3 40.6 32.1

Dec-11
69.4 23.0 6.4 19.1 -27.9 40.2 36.6 54.3 51.3 37.9

Jun-11

37.0 30.4 21.9 18.8 53.3 33.2 30.2 36.1 28.6 34.4

programme, the pace of accumulation of Net Foreign Assets (NFA) in the banking system on the other hand, significantly slowed down, especially in Q4, closing the year with an annual growth of 37 per cent compared to a target of 38.8 per cent and 46.3 per cent in December 2010. In terms of composition, the growth of M2+ over the period was reflected significant slowdown in the pace of domestic currency deposits expansion while foreign currency deposits growth surged with increased exchange rate volatility in the period (Chart 2).

Cum ulative change from previous year end (in per cent) Net Foreign Asset 79.9 46.3 18.0 Net Domestic Asset 5.5 26.0 6.3 o/w: Claims on government (net) 53.3 15.6 -3.0 Broad Money(M2+) 25.5 33.8 11.3

37.0 30.4 21.9 33.2

Annual per cent contribution to m oney supply grow th Net Foreign Asset 21.5 17.8 25.7 Net Domestic Asset 4.1 16.0 14.5 Total Liquidity (M2+) 25.5 33.8 40.2 Mem orandum item s Reserve Money NFA ($million) Currency ratio RM multiplier

15.6 17.6 33.2

3039 2753 0.26 2.48

4410 3904 0.27 2.48

4243 4519 0.22 2.72

5780 5082 0.26 2.46

Chart 2:Composition of M2+ (Annual growth rates, per cent) 80.0 70.0 60.0 50.0
M2+ Curr. Dem. Dep Sav & Time Dep FCDs

per cent

40.0 30.0 20.0 10.0 0.0

Dec-09

Dec-10

Mar-10

Mar-11

Dec-11

Sep-10

Sep-11

Jun-10

Jun-11

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Reserve Money (RM) Year-on-year growth of RM slowed down to 31.1 per cent in December 2011 from 45 per cent in December 2010. The growth in RM was supported entirely by BOG NFA accmulation which expanded by
Per cent
100.0 80.0 60.0 40.0 20.0 0.0 -20.0 -40.0 -60.0 25.0 28.2 45.0 41.6

Chart 3: RM Growth and contribution from NFA and NDA

RM NFA

NDA

27.3 per cent over the 12months to December 2011, though a slowdown from the 60 per cent expansion recorded over the same period in 2010.

31.1

38.8

Consistent with the monetary program, growth of BOG NDA declined at a moderate pace of 7.1 per cent in 2011 compared with the sharp decline in 2010, reflected in part by significant expansion of BOG net claims on government, though the latter was moderated by strong sterilization through repos. In terms of composition, the growth of RM was reflected mainly in DMBs reserves and currency outside banks. Provisional RM developments in

Table 2: Sources of Growth in Reserve Money (millions of Ghana cedis unless otherwise stated) Dec-09 Jan-10 Dec-10 Jan-11 Dec-11 Net Foreign Asset 3271 3291 -478 1285 -382 -1554 2813 1941 830 5241 -831 1371 -814 -935 4410 2927 1320 5649 -1667 1081 -1094 -2326 3983 2745 1160 6670 -890 1943 -1861 -437 5780 3894 1709 27.3 -7.1 41.7 31.1

Jan-12 5719 -192 2434 -1016 -541 5527 3541 1832 1.2 88.5 125.1 38.8

Net Domestic Asset -230 o/w Claims on government (net) 1390 Claims on DMB's (net) -372 OMO Sterilisation Account -1442 Reserve Money(RM) o/w: Currency o/w: DMB's reserves Net Foreign Asset 3041 2082 873

Change from previous year (in per cent) 69 71 60 72 -146 -4 25.0 280 -7 28.2 -261 -1.3 45.0 -249 -15.8 41.6

Net Domestic Asset o/w: Claims on government (net) Reserve Money(RM)

Cumulative change from previous year end (in per cent) Net Foreign Asset Net Domestic Asset o/w: Claims on government (net) Reserve Money(RM) 69.4 -145.8 -4.0 25.0 0.6 -107.8 -7.5 -7.5 60.2 -261.4 -1.3 45.0 7.8 -100.5 -21.1 -9.7 27.3 -7.1 41.7 31.1 -14.3 78.5 25.3 -4.4

January 2012 showed some firming up by 38.8 per cent, compared with 41.6 per cent over January 2011, underpinned entirely by NDA of BOG, which in turn was driven by NCG (Table 2).

Annual per cent contribution NFA NDA RM growth (y-on-y) Memorandum item Total Sterilisation 55.1 -30.1 25.0 -1540 62.1 -33.9 28.2 -1649 64.8 -19.8 45.0 -1493 83.8 -42.3 41.6 -3088 32.4 -1.3 31.1 -1876 1.7 37.0 38.8 -1001

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Deposit Money Banks (DMBs) Credit Developments

Provisional data available on growth of outstanding DMBs credit to the private sector and public institutions indicates growth of credit recovered significantly in 2011, absorbed mainly by services, import trade and commerce and finance.

DMBs credit to the private sector and public institutions over the 12-month period to December 2011 increased by GH1,357.7 million (17.0%), up from GH1,066.0 million (15.4%) recorded for the same period in 2010. Outstanding credit at end-December 2011 was GH9,352.4 million. Real annual growth of DMBs credit rose to 7.7 per cent in December 2011 from 6.3 per cent in December 2010. The private sectors share in banks outstanding credit rose to 91.5 per cent at end-December 2011, up from 84.8 per cent at the end-December 2010. Sectoral distribution of the flow of credit

Table 3

As at end-Dec 2010 Dec-09 Dec-10 Dec-11 1274.7 1218.1 791.5 5,654.0 305.7 90.5 767.3 262.7 178.0 367.9 526.2 837.7 274.3 1,353.0 690.6 6,928.6 18% 82% 6,776.6 456.2 136.9 1,054.1 297.0 201.9 461.0 581.6 1,089.1 323.7 1,565.8 609.1 7,994.7 15% 85% 8,560.9 501.0 108.3 822.7 376.9 395.3 860.8 735.1 1,333.7 427.7 2,247.1 752.3 9,352.4 8% 92%

a Public Sector b Private Sector Agric.,For. & Fish. Export Trade Manufacturing Trans.,Stor., & Comm. Mining & Quarrying Import Trade Construction Commerce & Finance Elect.,Gas & Water Services Miscellaneous c Grand Total Public Private

Year-On-Year Variation Share in As at end-Dec 2011 Share in annual flow annual flow (%) (%) Abs Percent Abs Percent -56.6 -4.4 -5.3 -426.53 -35.02 -31.4 1,122.7 150.6 46.4 286.8 34.3 23.9 93.1 55.4 251.5 49.4 212.8 -81.5 1,066.0 19.9 49.3 51.3 37.4 13.1 13.4 25.3 10.5 30.0 18.0 15.7 -11.8 15.4 105.3 13.4 4.1 25.5 3.1 2.1 8.3 4.9 22.4 4.4 19.0 -7.3 1,784.3 44.8 -28.6 -231.4 79.9 193.4 399.7 153.5 244.6 104.0 681.2 143.1 1,357.7 26.3 9.8 -20.9 -22.0 26.9 95.8 86.7 26.4 22.5 32.1 43.5 23.5 17.0 131.4 2.5 -1.6 -13.0 4.5 10.8 22.4 8.6 13.7 5.8 38.2 8.0

Chart 4: Shares in annual Sectoral Flow of credit to the private sector

Services Import Trade Commerce & Finance Mining & Quarrying Construction Miscellaneous Elect.,Gas & Water Trans.,Stor., & Comm. Agric.,For. & Fish. Export Trade Manufacturing -20.0 -10.0 0.0 10.0 20.0 30.0 40.0 50.0 2011 2010

30.0
per cent

Chart 5: Private sector credit (y-on-y)

nominal real
26.3 16.3

to the private sector over the 12-month period showed services, import trade commerce and finance as well as mining and quarrying collectively absorbed 85.1 per cent of the credit extended to the private sector over the period. With the

20.0 10.0 0.0 -10.0

Dec-09

Dec-10

Mar-10

exception of manufacturing and export trade, which recorded some declines in credit flow, all the other sectors witnessed some increases in the range of 2.5 8.6 per cent (see Table 3).

Mar-11

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Dec-11

Sep-10

Sep-11

Jun-10

Jun-11

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Real annual growth of DMBs credit to the private sector recovered significantly to 16.3 per cent in December 2011, from the annual growth of 10.4 per cent recorded in December 2010.

3.0

Money Market Developments

Money market developments in 2011 generally reflected significant easing of inflation expectations however with some shortening of the maturity structure of government securities from November 2011. Alongside, interest rates recorded significant declines over the period. A revision of the monetary programme in October which allowed for higher monetary targets with slower build up of external reserves (NIR) and a slower pace of OMOs resulted in Overnight rates falling outside the policy corridor. However, an increased pace of forex interventions withdrawing cedi-liquidity, is realigning the interbank rate with the policy corridor in February 2012.

Government Securities Market: Maturity Structure of Outstanding Government Securities Market demand for government Chart 6: Maturity profile of Government securities securities continued to shift towards long-dated instruments in October 2011
per cent Share

80.0 70.0 60.0 50.0

S-T

in line with the easing of inflation and inflation expectations. The share of the short-dated securities1 in the outstanding stock of government securities fell to 27.2 per cent in October 2011 from 35.1

40.0 30.0 20.0

Mar-11 Dec-08 Dec-09 Dec-10 Dec-11 Oct-11 Sep-09 Sep-10 Sep-11 Jun-10 Jun-11 Nov-11 Jan-12

Others

per cent in June 2011 and 38.3 per cent in December 2010. This however inched upward to 28.2 per cent at end-November 2011 and further to 36.2 per cent in January 2012. Interest Rates
Box 1: RECENT MPC POLICY DECISIONS
The monetary Policy Committee cut the MPR by 100bps to 12.5 per cent in 2011 in response to easing inflation expectations. At its maiden meeting in February 2012, the Committee raised the MPR by 100bps to 13.5 per cent citing elevated upside risks to inflation, mainly from a possible contagion from the continued Eurozone debt crisis, fiscal pressures and the unusual upward volatility in the foreign exchange market observed in January 2012.

20.0 18.0 16.0 14.0 12.0

Jan-06

BoG Policy Rate

Jul-06

Jul-07

Jul-08

Jul-09

Jul-10

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jul-11

BOG Policy Rate, Repo, Interbank, Treasury bill and bonds rates, Inflation and Interbank market liquidity Interest rates on the auction market generally declined in the year through October,
underpinned by significant decline in inflation expectations. However, in November and
1

Includes 91-days and 182-days treasury bills

Jan-12

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December, the rates firmed somewhat as inflation expectations edged up, with a marginal increase in inflation. In the first 10-months of 2011, the 91-day Treasury bill rate declined by 312bps but firmed up by 153bps from October to 10.67 per cent in December 2011. Similarly, the 182-day Treasury bill rate shed 282bps during the first 10-months of 2011, firming up by 140bps to
per cent

30 25 20 15 10 5

Chart 7: The Yield Curves (Dec 2009 through Jan 2012)

Dec-09

end-December 2011 at 12.4 per cent. The rates on the 1-year note and the 2-year fixed rate note followed similar patterns, rising by 30bps and 150bps respectively to 11.3 per cent and 12.4 per cent.

Dec-10

Sep-11

Dec-11

Jan-12

91-days 182 days

1yr

2-fix

3-fix

5yr

100.0
per c ent deviation from mean

Chart 8: Inflation Expectations Dynamics and Spreads in the Money Market Using Level and Slope of the Yield Curve
level

Also, in January 2012, the 91-day Treasury bill rate increased further to 10.97 per cent while the 182 day rate increased marginally to 11.23 per cent. The 1-year note has since moved up to 11.4 per cent while the 2-year note has dropped to 12.3 per cent.

50.0 0.0 -50.0

slope (spread)

O c t/ 09

O c t/ 10

Feb/ 09

Feb/ 10

Dec / 08

Dec / 09

Dec / 10

Feb/ 11

O c t/ 11

Aug/ 09

Aug/ 10

Overnight interbank rates, the rate at which commercial banks deal with each other, after remaining close to the floor of the policy rate corridor (reflecting the strong liquidity situation on the market Chart 9), fell below the corridor in November following a re-calibration of the monetary programme in October 2011. The recalibration exercise allowed for a moderately higher monetary growth with both reduced NFA accumulation and OMOs, consistent with the inflation target for the period. The Overnight rate dropped from 11.7 per cent in January to 10.5 per
per cent
30 25 20 15 10 5

Chart 9: Alignment of the Policy Rate, Repo, 91- Day T' Bill, Interbank and Inflation Rates
In terb ank 9 1 -Day T'Bill

In f lation Rep o rate

Jun/09

Jun/10

Jun/11

Sep/09

Sep/10

Aug/ 11

Policy Rate

Dec/08

Dec/09

Dec/10

Sep/11

Mar/09

Mar/10

Chart 10: BoG Policy Rate and Selected DMB Interest Rates 38 33 28 23 18 13 8 3
Jun-09 Mar-09 Dec-08

Mar/11

December 2011. A significant increase in forex sales in the foreign exchange market, giving rise to some tightness of liquidity conditions on the interbank market in January 2012, is broadly realigning the interbank rate in the policy corridor.

Base Rate PR Savings 3-mth TD

Sep-09

Sep-10

Mar-10

Mar-11

Dec-09

Dec-10

Sep-11

Jun-10

Jun-11

Dec-11

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per cent

cent in October, and fell sharply to 6.3 per cent in

Lending

38 33 28 23 18 13 8 3

Dec/11

Dec / 11

Jun/ 09

Jun/ 10

Apr/ 09

Apr/ 10

Apr/ 11

Jun/ 11

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The average bank base and lending rates similarly declined in the period. Average base rates fell by 332bps to 22.5 per cent while lending rates eased downward by 170bps to 25.9 per cent in 2011. Over the same period, the average savings and deposit rates declined by 183bps and 275bps to 4.1 per cent and 7.8 per cent respectively.

4.0

Stock Market Developments

The Ghana Stock Exchange (GSE) The GSE generally witnessed bearish sentiments in 2011, pulled down mainly by stocks in the finance sub-sector on the back of selling pressures. After recording some impressive performance in H1 2011, investors engaged in profit taking activities that effectively reversed the earlier strong performance recorded mostly in H1. By the end of December 2011, the GSE Composite Index (GSE-CI) closed lower at 969.03 points, signalling a cumulative loss of 3.1 per cent compared with a return of 18.9 per cent during the first half. The GSE Financial Stocks Index (GSE-FSI), which mainly underpinned the markets performance closed December at 863.09 points, representing a loss of 13.7 per cent compared with 16 per cent during H1 2011. Total market capitalization more than at the endto
0 -10 -20
Buy govt securitues

Chart 11: GSE Indices (end-December 2011 % returns) 1-day 1-week 1-month 3-months H1 1-year -20.0 -10.0 0.0 10.0 20.0 30.0

GSE-FI GSE-CI

40.0 30.0 20.0 10.0 0.0

Chart 12: GSE: PE Ratio

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Chart 12a: GSE Equity Earnings spread over Gov't securities

Buy Equity Average= -10.6

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

GH47.3 billion from GH20.5 billion at end-

H1 2011, mainly on the back of the listing of oil giant Tullow oil.

An analysis of the PE ratio on the GSE indicates that the ratio generally declined in 2011 below its long term trend, broadly reflecting the significant share price declines, thus Page | 7

Dec-11

Jun-03

Jun-04

Jun-05

Jun-06

Jun-07

Jun-08

Jun-09

Jun-10

Jun-11

December

2011

doubled

-30

Dec-11

Jun-03

Jun-04

Jun-05

Jun-06

Jun-07

Jun-08

Jun-09

Jun-10

Jun-11

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making most of the shares cheaper and attractive relative to historical trends, with a positive outlook for the bourse in 2012 (see charts 12 and 12a).

5.0

Conclusion

The economy continued to hold firm in 2011 and the end-year inflation target was achieved. Also, economic growth, buoyed by debut commercial oil production, remains
strong despite a marginal drop to 13.6 per cent in 2011 from the earlier projection of 14.4 per cent. The 2012 budget and economic policy statement is predicated on ensuring

continued macroeconomic stability.

Growth of the key monetary aggregates remained in line with targets in 2011, with strong credit growth in support of economic growth. Private sector credit growth recovered strongly

in the year, exceeding program expectation while in the money market developments
generally reflected an easing of inflation expectations and marginally lower interest rates.

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