Ghana’s central bank increased its benchmark interest rate to the highest level in more than 19 years to cool persistent inflation.
The monetary policy committee raised the cost of borrowing by 250 basis points to 27%, governor Ernest Addison told reporters Monday in the capital, Accra. The median estimate of eight economists in a Bloomberg survey was for an increase of 175 basis points.
The MPC acted as a “significant upside outlook to inflation remains”, Addison said. The central bank will also monitor the impact of recent currency weakness on price growth, he said.
Inflation has been fanned by surging commodity prices stemming from Russia’s war with Ukraine and the West African nation’s plunging currency.
The cedi, the world’s worst-performing currency this year, has depreciated by almost 28% since the MPC raised borrowing costs by 250 basis points on October 6, placing pressure on the nation to meet its import bill, which exceeds $10bn (R171bn) a year, finance minister Ken Ofori-Atta said in his annual budget presentation. It’s also made debt repayments more expensive.
The nation’s debt is junk, and it’s now asking bondholders to accept losses on their investment.
Inflation is forecast to peak in the first quarter of 2023, the governor said.
The move adds to cumulative rate increases of 11 percentage points since November, aimed to temper runaway inflation that’s now quadruple the top of the central bank’s target band of 6% to 10% and bring the real policy rate back into positive territory to attract investment.
The cedi gained 0.3% against the dollar to 14.45 in Accra on Monday.
Bottled water prices rose 64% in October and fruit and vegetable juices 54% from a year earlier.
Inflation measures
The hike adds to measures taken by the Bank of Ghana earlier this month to prevent a slide in the cedi and contain inflation such as no longer providing foreign exchange for imports of rice, bottled water, poultry, fruit juice and other “non-critical goods”, according to a circular sent to lenders.
Bottled water prices rose 64% in October and fruit and vegetable juices 54% from a year earlier.
The government has taken its own steps to help. It’s ordered large gold-mining companies from January 1 to sell a fifth of the metal they refine to the nation’s central bank, as Ghana embarks on a plan to barter bullion for fuel.
The decision is likely to add further strain on consumers and businesses. The S&P Global Ghana Purchasing Managers’ Index has been below 50 since February, indicating a deterioration in business conditions.
Increasing economic hardship has fuelled protests and led to calls for the finance minister to resign. It’s also prompted the nation to seek a $3bn (R51.4bn) economic programme from the International Monetary Fund.
Goldman Sachs economists, who correctly forecast the increase, said they expect Ghana to reach an agreement with the IMF staff in the next month or two. “If this takes place, we think it would provide some anchor for the cedi as well as for monetary policy and inflation.”
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