The Bank of Ghana has, in a surprise move, increased its main benchmark interest rate by 100 basis points to 26 per cent from 25 per cent to fend off mounting inflation and consolidate the stability of the cedi.
This is the third raise by the central bank this year since the beginning of the year when the policy rate was pegged at 19 per cent.
The Governor of the Bank of Ghana, Dr Henry Kofi Wampah, said at a news conference in Accra that the risks to inflation outlook were on the upside, with a likely drift from the medium-term target.
“The committee will continue to monitor developments in the economy and take appropriate action, if necessary, including the possibility of lowering the policy rate once inflation expectations are well-anchored,” he said.
Governor Wampah said the current level of inflation,17. 4 per cent, was far above the medium target of eight plus or minus two per cent.
He mentioned the upside risks to inflation outlook such as worsening external financial conditions and the planned utility tariff adjustments, which were now likely to be higher than anticipated.
This is expected to tighten credit squeeze and increase the lending rates of commercial banks, which currently average between 31 and 36 per cent, depending on the bank.
Headline inflation inched up from 17.3 per cent in September to 17.4 per cent in October, which indicates some moderation in price movements over the past three months, supported by tight monetary policy stance, the appreciation of the exchange rate in July, as well as falling crude oil prices, he observed.
Though monetary policy remained tight, Dr Wampah said assessment of the current economic conditions showed that some additional tightening was required to re-anchor the disposal of inflation expectations.
“This, together with the ongoing fiscal consolidation, is expected to break the high inflation inertia.
“Our current forecasts showed that without any additional policy adjustment, inflation is likely to drift farther away from the target band and lengthen the forecast horizon into late 2017.”
Dr Wampah, however, noted that on a year-to-date basis, the Ghana cedi depreciated by 15.5 per cent as at October 2015, compared with 31.2 per cent in the corresponding period of 2014, adding that going forward, maintaining a tight monetary policy stance would reinforce the relative stability in the foreign exchange market and dampen risks related to the external financial conditions.
Economic Activity Composite Index
For September 2015, the Governor said the bank’s Real Composite Index Activity (CIEA) indicated a slow pace of growth compared with the same period in 2014.
However, in the medium term, the Head of the BoG said growth conditions were expected to recover, supported by a turnaround in the energy situation, increased production of oil and gas and a general improvement in the macroeconomic environment as inflation started trending down.
Fiscal consolidation, he indicated, was on track and for the first nine months of the year, the overall budget balance registered a cash deficit of 5.1 per cent of GDP, which is within the programme target of 5.7 per cent.
“Maintaining the fiscal consolidation efforts will complement the tight monetary policy stance for the attainment of the medium-term inflation target. This would in turn help create conditions for long-term sustainable growth”, he stated.