In a bid to tame the country’s growing inflation rate as well as the poor performance of the cedi the Bank of Ghana today 14th September, 2015 increased the monetary policy rate to 25 percent.
[contextly_sidebar id=”mUYm78MyTRmZvMHyOSVfrsqU60xAHtK4″]The figure is one the highest in the history of the country.
The last time the figure went that high was in January 2003 when it was pegged at 25.50 percent.
Prior to hitting 25 percent it was at 24 percent.
The monetary rate is the rate at which the central bank lends to commercial banks and is also used by banks to calculate their base rates.
The latest hike is expected to tame inflation but will see banks increase interest on loans as well as reduce access to credit.
Ghana has one of the highest interest rates in the world.
Interest on bank loans in the country on the average are currently going for between 25 and 35 percent.
Speaking to the press the Governor of the Bank of Ghana Dr Henry Kofi Wampah said the Monetary Policy Committee (MPC) of the central bank was forced to increase the policy rate to 25 percent due to uncertainty in the foreign exchange market as well as heightened inflationary pressures.
‘ At the end of the deliberations, the Committee decided to increase the monetary policy rate from 24 to 25 percent. Since the beginning of the year, inflation pressures have persisted due to uncertainties in the foreign exchange market, with implications for petroleum pricing and other tradable goods and services. Inflation and inflation expectations remain elevated and outside the medium term target band of 8±2 percent. Following the last MPC meeting, the Ghana Statistical Service has released three more readings of headline inflation. From 16.9 percent in May, CPI inflation increased sharply to 17.9 percent in July, mainly reflecting the upward adjustments in petroleum and transport prices’.
According to him ‘some moderation occurred in August with inflation declining to 17.3 percent, still higher than the June reading of 17.1 percent. Core inflation (CPI excluding energy and utilities), however, continued to rise, suggesting persistent underlying inflation pressures. The current forecasts suggest that attainment of the medium term inflation target by the end of 2016 would require further tightening in the monetary policy stance else the target horizon will shift into 2017. Also, there are potential upward risks to the inflation forecast stemming from the planned significant increases in utility tariffs’.
The cedi this year alone has depreciated in excess of 27 percent against major foreign currencies, it however begun showing some level of stability some weeks back.
While inflation has also be increasing steadily since the beginning of this year, it hit 17.9 percent in July but dropped to 17 .3 percent last month.
But the hike in the policy rate has come as no surprise to some industry players who had predicted that the Bank of Ghana will increase the rate following pressure from the International Monetary Fund (IMF) to do so.
The IMF in its review of Ghana’s economic performance under the Extended Credit Facility (ECF) asked the monetary policy stance of the central bank to remain tight to help bring inflation down, against the background of exchange rate volatility.
It tasked the Bank of Ghana to stand ready to tighten monetary policy further if inflationary pressures do not recede as expected.
It appears the BoG in a bid to keep inflation at bay will yield to the IMF’s demands.
According to Dr Henry Kofi Wampah ‘consistent with the attainment of the inflation target by the end of 2016 therefore, the MPC is determined to prevent first round effects of the likely increases in prices and the higher cedi liquidity during the fourth quarter from being entrenched into elevated inflation expectations. Since the previous meeting of the Committee, the volatility in the exchange rate has continued. On month-on-month basis, the Ghana cedi appreciated against the US dollar, in July, by 25.5 percent, and depreciated, in August, by 14.8 percent. This uncertainty in the foreign exchange market heightens inflation expectations. In the coming months, however, the currency volatility is expected to be moderate due to a tight monetary policy stance and the anticipated inflows from the Eurobond issue and the syndicated pre-export finance facility for cocoa’.
By: Vivian Kai Lokko/citifmonline.com/Ghana