Monetary Policy Framework
Elements of the Framework
Mandate of Bank of Ghana
The primary objective of the Bank of Ghana is to maintain stability in the general level of prices, as stated under section 3 of the Bank of Ghana Act 2002, (Act 612), as amended. In addition to price stability, the Bank is enjoined to support the general economic policy of Government, promote economic growth and development, and ensure effective and efficient operation of the banking and credit system; and contribute to the promotion and maintenance of financial stability.
Establishment of Monetary Policy Committee (MPC)
On the conduct of monetary policy, the BOG Act 2002, Act 612 as amended, section 27, established a Monetary Policy Committee (MPC) responsible for the formulation of monetary policy of the Bank. The members of the Monetary Policy Committee are:
- the Governor,
- the First and Second Deputy Governors,
- the Head of the Department responsible for economic research of the Bank,
- the Head of the Department responsible for Treasury operations of the Bank, and
- two external members – not employees of the Bank and appointed by the Board – with knowledge and experience, which is relevant to the functions of the Monetary Policy Committee.
Frequency of MPC Meetings
The Governor of the Bank of Ghana chairs the seven-member Monetary Policy Committee, which meets bi-monthly over a three-day period to assess current economic conditions and the inflation outlook. After deliberations, the monetary policy rate decision is finalised by a vote of the Committee on a one-person one-vote basis, with each member stating clearly and with reasons the choice of a preferred decision. In instances where a decision of the Committee is not clear, the final decision is by consensus. To provide certainty to the markets, MPC meeting dates are published on the Bank’s website at the start of each year.
The Policy Framework
In 2007, the Bank of Ghana officially adopted an Inflation Targeting (IT) framework underpinned with a flexible exchange rate regime. The framework is designed to ensure price stability over the medium-term. To achieve this, the central bank has put in place institutional, accountability, and operational structures to support the implementation of the IT framework.
The Medium-Term Inflation Target
At the institutional level, the Government and the Central Bank jointly set the medium-term inflation target, and the Bank of Ghana is required to deploy its policy tools to attain the target. Currently, the Bank’s inflation target is 8% with a symmetric band of 2%). At the operational level, inflation forecasts play an important role of determining the extent of likely deviation from the inflation target. The Bank has developed a suite of models for forecasting inflation. These models rely heavily on a number of indicators containing information about the future evolution of inflation. The Central Bank therefore implements a forward-looking operating procedure in which monetary policy instruments are adjusted (in line with the assessment of future inflation and general macroeconomic situation) to attain the desired target.
Monetary Policy Tools and Additional Policy Measures
The main policy tool employed by the MPC is the Monetary Policy Rate (MPR), which signals the stance of monetary policy and anchors short-term market interest rates to achieve the primary objective of price stability. In exceptional times and under unusual circumstances, the MPC may announce additional macroprudential policy measures in addition to its regular interest rate decision. These measures usually involve the utilization of other monetary policy tools at the disposal of the Central Bank, such as moral suasion and macroprudential measures. These instruments may be deployed to address perceived structural bottlenecks to current policies to avoid burdening the extent of use of the MPR which may have unintended consequences on the real economy.
Communication, Transparency, and Accountability in the MPC Process
The Bank of Ghana promotes transparency and accountability to anchor inflation expectations effectively within the target band. To start with, a day prior to the announcement of an interest rate decision, the Bank releases what is referred to as the MPC ‘DataPack’, that is, a summary of the macroeconomic and financial sector data used during the Committee’s decision-making process. This provides background information to stakeholders, which generates informed economic discussions before the Governor announces the latest positioning of the policy rate.
After each policy meeting, the Bank of Ghana holds press briefings to explain in detail, the interest rate decision and any other monetary policy course of action taken. The format requires the Governor to address questions from the media and the transcript of such proceedings is published on the website. The Bank does not publish the MPC minutes. However, it publishes the monetary policy and banking sector reports after each MPC meeting. The reports analyse developments in the world economy and exchange rates, external sector, fiscal, monetary and financial sector, real sector, domestic prices, and the inflation outlook, at the time of the meeting.
The Bank is also accountable to the legislature and required to submit a monetary and financial stability report that provides extensive details on the monetary policy course of action to parliament twice a year. As conditions determine, the legislature may issue summons to the Governor to appear before its Finance Committee to address specific issues bordering on the conduct of monetary policy and financial stability.
Key Features of the Implementation Framework
At the operational level, the key strategy is to help implement MPC decisions regarding changes in the Monetary Policy Rate (MPR), and to introduce operating procedures to support the development of monetary policy transmission. The MPR signals the monetary policy stance and it is the rate at which short-term monetary policy operations are conducted with counterparties – mainly, the commercial banks, on a day-to-day basis. Typically, the MPC meets six (6) times in a year, which implies that six MPR decisions are announced in a year.
Market Operations and the Interest Rate Corridor
The Bank of Ghana uses an interest rate-oriented monetary policy operation. Thus, the Bank determines its policy rate, the MPR, and keeps the overnight interbank rate closely aligned with the policy rate using its policy instruments. The Bank of Ghana currently uses four sets of instruments to defend the MPR. These are the repurchase agreements (repos), the open market operations (OMO) instruments (the Bank of Ghana bills), term deposits, and reserve requirements. The frequency of issuance and instrument types are reviewed intermittently based on assessments of prevailing market conditions.
The major tool that the Bank of Ghana uses to defend the Monetary Policy Rate (MPR) is through the overnight repo and reverse repo facilities. The Financial Markets Department (FMD) of the Bank operates an Interest Rate Corridor (IRC) system to ensure that overnight rates remain in line with the MPR, reduce volatility of overnight interest rates, and eliminate any chance of persistent swings of market rates.
Under the interest rate corridor system, the Bank sets the floor and ceiling of the policy rates and lets the interbank rate to move within the floor and ceiling. The upper limit is the reverse repo rate, that is, the rate at which BOG lends funds to the banks. The lower limit is the depo rate, the rate at which banks deposit funds at the central bank. The depo and reverse repo rates are indexed to the MPR. The choice of the width of the interest rate corridor is a policy decision of the MPC. Currently, the FMD operates two windows for its overnight liquidity operations.
- Window One: Symmetric Corridor for normal operations
This window conducts depos at MPR minus 100 basis points (bps), reverse repos at MPR plus 100 bps, and operates between 10:00a.m. and 12:30p.m. It is expected that the overnight interbank rate will be within the Window one corridor.
- Window Two: Symmetric Corridor for late operations
This window conducts depos at MPR minus 500 bps and reverse repos at MPR plus 500 bps, and operates between 3:00p.m. and 4.00p.m. This corridor seeks to accommodate late monetary operations by market participants, but penalises these agents for missing the normal window. The essence is to ensure greater efficiency in the liquidity management operations of commercial banks through conscious efforts at avoiding additional operational costs.
Open Market Operations
The FMD conducts weekly open market operations by auctioning Bank of Ghana securities. Effective January 2018, the Bank commenced the issuance of 14-day and 56-day BOG bills on a weekly basis for OMO. The 56-Day OMO instrument is issued every Monday and the 14-Day OMO instrument issued every Wednesday. The 14-Day instrument is issued at the policy rate while the 56-Day instrument is issued at competitive market rates allowing the banks to quote competitive rates. Allotment of the 56-day OMO auction is done on a Dutch auction system basis. The objective of the 56-day OMO instrument is to lengthen the maturity profile of OMO instruments and mop up excess liquidity that is thought to exist on a longer-term basis.
The FMD also operates the 7-Day Term Deposit instrument for banks that show persistent excess liquidity over a three-day period. Banks that have persistently high liquidity over a three-day period are required to place these funds for seven days at a current rate of MPR minus 150 bps. Through monitoring of the opening positions of Deposit Money Banks, the movement of funds and cheques clearing results from GHIPPS (the national settlement platform), FMD derives useful insight into market liquidity levels and this aids decision-making in respect of its market operations.
Foreign Exchange (FX) Operations
The multiple-price forward FX auction aims to improve price discovery, deepen the FX market, and reduce uncertainty about future availability of FX to meet the needs of banks’ clients. This is expected to ease pressure on the spot market and minimise front-loading of forex purchases by economic agents and thus reducing the pressure on the spot market.
Forward FX contracts exist in the following tenors: 7, 15, 30, 45, 60 and 75-day in addition to foreign currency swaps. At the operational level, bids are accepted from agents through their respective commercial banks across the available tenors in accordance with market rules published by Bank of Ghana. Successful bids are notified and the Cedi equivalent of the FX demand are debited from the commercial banks’ operational accounts with a guarantee to settle the FX component at an agreed date in line with standard settlement rules.
Within the monetary policy operational framework, reserve requirements (RR) have a role to help with prudential and liquidity management. Reserve Requirements aim not only at contributing to sterilisation of commercial bank reserves, but also at keeping liquidity buffers for financial stability reasons. With regard to the reserve requirement system, the Bank of Ghana mandates commercial banks to hold a certain ratio of their liabilities subject to reserve requirements in their accounts with the central bank. The reserve requirement ratio of total deposits (domestic and foreign) currently stands at 8 percent and is mandatorily held in domestic currency. The reserve ratio is calculated as the simple average of all deposits (including demand, time, savings and foreign currency deposits) and has a maintenance period of one week. The reserves are currently unremunerated and unavailable to the commercial banks for lending.