Ghana surprises markets with hike as inflation seen lingering
Ghana’s central bank surprised financial markets by raising borrowing cost to a record high to speed up a deceleration in inflation.
The monetary policy committee lifted the rate to 30% from 29.5%, Governor Ernest Addison told reporters in the capital, Accra, on Monday. Only three of 13 economists in a Bloomberg survey predicted an increase.
The cedi stayed about 0.3% weaker after the announcement to trade at 11.48 per the dollar by 12:32 p.m. in Accra. The nation’s dollar bond maturing in 2032 fell slightly to 41.18 cents on the dollar, according to Bloomberg generic pricing.
“Although inflation is expected to decline in the near term, baseline forecasts show a slightly higher elevated profile in the year ahead, which if not contained could embed in underlying inflationary pressures,”Addison said. “It is important that policy responds appropriately and decisively to prevent these rates from becoming embedded and consequently derail the disinflation process.”
Annual inflation, which has been above the central bank’s 6% to 10% target range since September 2021, unexpectedly quickened in the past two months to 42.5%.
“In the committee’s assessment, risks to inflation’s profile are judged to be elevated, driven by second-round effects of food prices,” Addison said.
Fiscal Policy
Fiscal policy may also help temper inflation. Finance Minister Ken Ofori-Atta’s will on Tuesday present the West African nation’s first mid-term budget review since the government began restructuring the nation’s debt in December and sealed a $3 billion bailout from the International Monetary Fund in mid-May to support its economic recovery.
The IMF program was conditional on the government committing to reining in spending and collecting more revenue, which will have implications for inflation. The world’s second-largest grower of cocoa beans plans to reduce debt to 55% of gross domestic product by 2028 from 71.2% of GDP at the end of 2022.
The move is likely to add further strain to households and businesses grappling with the high cost of living and weigh on economic growth.
The World Bank’s local office said in a report last week that Ghana’s gross domestic product growth will slow to 1.5% in 2023 from 3.1% in 2022 and remain depressed at 2.8% next year, before recovering to its potential from 2025.
The decision may also add to pressure on the banking industry. Banks’ annual loan growth almost halved to 15.4% in June from a year earlier and non-performing loans rose to 18.7% from 14.1% over the same period. Lenders have been negatively impacted by the country’s debt overhaul.
“So far we haven’t had any bank apply for emergency liquidity support,” Addison said.
