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BoG aims to tame  inflation with rate hike
Dr Ernest Addison, Governor, BoG

BoG aims to tame inflation with rate hike

THE Bank of Ghana (BoG) has increased its policy rate to 27 per cent from 24.5 per cent to help suck out the pressure that is driving up prices of goods and services.

The central bank raised the policy rate by 250 basis points yesterday in an attempt to discourage large supply of money, which is fuelling the price increments.

It followed the conclusion of the Monetary Policy Committee (MPC) meeting which decided that more needed to be done.

Inflation ended October at 40.4 per cent, the highest in more than 20 years, at a time when the cedi had lost more than 54 per cent of its value in the first quarter of the year.

The Governor of BoG, Dr Ernest Addison, said at a press conference yesterday that the bank’s assessment showed that the situation required continuous maintenance of tight monetary policy stance and the deployment of tools to contain excess liquidity in the economy.

“There are, however, some risks to this forecast that would have to be monitored, including additional pressures from the proposed value added tax (VAT) increase, and the exchange rate pressures.”

“Continued vigilance to the evolution of these potential price pressures in the outlook will be key,” Dr Addison said.

Implications

Since November last year when inflation resurged, BoG has raised the policy rate by 1,250bp to help dampen the pressure and keep prices down.

Dr Addison said those increments were necessary as evidence showed that they helped to ease the price pressures.

“On the transmission of monetary policy changes to inflation, the committee was of the view that there is evidence that the policy rate increases in the past few months have helped dampen the pace of monthly price increases.”

“Between May and August 2022, the monthly inflation number eased from a peak of 5.1per cent to 1.9 per cent. However, this was reversed in September and October on account of additional shocks from upward adjustment in ex-pump petroleum prices, utility tariff adjustments, and transportation fare increases. In the event, inflation jumped in October 2022 to 40.4 per cent and has dragged along with it, core inflation, which is almost at par with headline inflation, indicating significant underlying inflation pressures and upside risks to the inflation outlook,” Dr Addison said.

COVID-19 remnants

The Governor said the rising inflation and weakening of the cedi were the results of the Covid-19 pandemic and the Russia-Ukraine.

He noted that those developments spilled over into currency pressures and imported inflation, complicated access to external capital markets, and resulted in acute capital outflows, especially in emerging markets and frontier economies.

“These external shocks have had severe consequences on the Ghanaian economy, reflected in high and rising inflation from exchange rate pass-through effects, and complicated the policy environment.”

“The foreign exchange market witnessed increased volatility, with intense pressure on the local currency, especially in September and October,” he said.

He said the tightening of global financing conditions, the sovereign downgrades, the de facto closure to the international capital market, portfolio reversals and increased demand for foreign exchange amid supply constraints had contributed to the significant weakening of the Ghana cedi.

He said the recent sharp depreciation of the currency had been driven by speculation of a possible debt restructuring, which led to portfolio rebalancing in favour of foreign currency holdings as against cedi denominated assets.

Dr Addison said the next few readings of inflation would shed light on the extent of pass-through of the accelerated depreciation of the cedi in October on inflation dynamics.

Fuel imports

Dr Addison said the import of petroleum products was having a toll on the current account.

He said notwithstanding the significant improvement in the trade surplus, largely driven by higher export receipts from increased gold production and higher crude oil prices, relative to imports, the current account deficit widened.

He said the deterioration reflected increased cost of imported petroleum products arising from higher crude oil prices.

“This underscores the fact that on average, higher crude oil prices have relatively modest gains on the trade account,” he said.

He also disclosed that the balance of payments swung into a deficit in the first nine months, from a surplus last year due to continuing large current account deficit and, outflows in the capital and financial account.

“These developments culminated in significant loss of reserves, resulting in further currency pressures.

“With no access to the international capital market for financing, reserves build-up has been constrained,” he said.

As of October the country’s gross international reserves position declined to US$6.7 billion, equivalent to 2.9 months of import cover, compared with the reserve level of US$9.7 billion (4.3 months of imports) at the end of December 2021.

The net international reserves, which exclude encumbered assets and petroleum funds, were estimated at US$2.8 billion as of October 2022.

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