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UPDATE 2-Ghana raises benchmark policy rate to highest level in 12 years
November 16, 2015 / 12:00 PM / 2 years ago

UPDATE 2-Ghana raises benchmark policy rate to highest level in 12 years

* Rate hike unexpected according to poll

* Central bank expects inflation to top 17 pct this year (Adds details, context)

By Kwasi Kpodo

ACCRA, Nov 16 (Reuters) - The Bank of Ghana on Monday unexpectedly raised its main policy rate by 100 basis points to 26.0 percent, the highest level in 12 years, in an attempt to contain above forecast inflation.

The central bank expects inflation to top 17 percent by the end of this year, well above an initial projection of 11.5 percent, bank governor Henry Kofi Wampah told reporters.

Ghana is under a three-year aid programme worth $918 million with the International Monetary Fund (IMF) to support an economy dogged by a high fiscal deficit, a debt-to-GDP level close to 70 percent, and a falling currency.

Inflation stood at 17.4 percent in October, unchanged from the previous month, and Wampah said that without any additional policy adjustments, it could drift further away from the government’s target band.

“Our forecast is for inflation to be between 17 percent and 17.4 percent, and it is not only the expected (U.S. Federal Reserve) decision (to raise rates) but also due to other external factors including developments in China,” he told reporters.

The central bank was expected to leave the policy rate unchanged, according to a Reuters poll last Friday. The increase marks the fourth rate hike this year.

Standard Chartered Bank Africa chief economist Razia Khan said the hike was necessary to protect the credibility of Ghana’s monetary policy.

“Nonetheless, the authorities still face a significant challenge, not least the need to reduce short-term local currency debt yields in order to ease Ghana’s financing burden,” she wrote in emailed comments.

Ghana’s overall balance of payments position worsened in the first ten months of 2015 to a deficit of $378 million, compared with a surplus of $181.6 million for the corresponding period of 2014, Wampah said.

Gross reserves at the end of October meanwhile stood at $5.7 billion or 3.4 months of imports cover.

The local cedi currency depreciated by 15.5 percent in the first 10 months of 2015, compared with 31.2 percent in the same period last year, he said.

Higher demand for imports and weaker prices for Ghana’s commodities have pushed the cedi lower, helping fuel inflation.

Wampah said the central bank was discussing further measures, including asking exporters to use Ghana’s banking system for repatriations, to remove seasonal pressures on the cedi.

“We will require that when you export you bring the funds back to Ghana, not necessarily selling it to the Bank of Ghana, but we want to make sure the money stays within the banking system in Ghana,” he said.

Ghana’s economy is expected to pick up speed next year, even as the government abides by spending limits set by the IMF, Finance Minister Seth Terkper said when he presented next year’s budget to parliament on Friday. (Reporting by Kwasi Kpodo; Editing by Joe Bavier and Toby Chopra)

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