Ghana ramps up interest rates in shock move to slow inflation

Ghana’s central bank raised interest rates by the largest margin in a generation on Monday in a bid to slow rampant inflation that threatens to create a debt crisis in one of West Africa’s largest economies.

The Bank of Ghana raised its main lending rate by 250 basis points to 17%, the biggest hike in more than 20 years, signalling an aggressive stance against rising inflation, a depreciating local currency and worsening investor confidence.

A Reuters poll of 10 economists last week predicted a 100 basis point hike.

“The uncertainty surrounding price development and its impact on economic activity is weighing down business and consumer confidence,” the bank’s governor, Ernest Addison, told a news conference. “The risks to inflation are on the upside.”

Ghana was long seen as a rising star among Africa’s emerging market economies, but underwhelming oil revenues and supply chain disruptions amid the COVID-19 pandemic have dampened expectations.

The bank had cut interest rates to 13.5% last May, its lowest level since early 2012, citing muted near-term inflation risks. But inflation has accelerated every month since, leading the Monetary Policy Committee to bump the rate back up to 14.5% four months later.

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That was Ghana’s first rate hike in more than three years. Monday’s decision marks the first time that the bank has increased the prime rate twice in one year since 2015.

Consumer inflation is at its highest level since 2016, having reached 15.7% year-on-year in February after nine months of increases. Food, transportation and housing prices have seen the greatest spikes.

Addison said that the conflict in Ukraine will likely fuel further rises in inflation and widen the country’s trade deficit. Ghana imports nearly a quarter of its wheat from Russia and around 60% of its iron ore from Ukraine, he said.

Addison said that the bank expects inflation to return to its targeted band of 8% plus-or-minus 2% by the end of the year.

Meanwhile, the local currency is depreciating at its fastest rate in decades.

The Ghana cedi has weakened by about 20% against the dollar this year, making it the second-weakest currency after the Russian rouble in a list of some 20 emerging market units tracked by Reuters.

Addison blamed that in part on recent downgrades by credit ratings agencies Moody’s and Fitch, which he said shook investor confidence.

Ghana’s total public debt stands at $50.8 billion (351.8 billion Ghanaian cedi), according to central bank figures, about 80% of the country’s gross domestic product.

Source: Reuters