BoG increases policy rate to 17% to tame inflation and reduce cedi depreciation

The Bank of Ghana has increased the policy rate by 250 basis points to 17% to tame the rising inflation and slowdown the rapid depreciation of the cedi.

This is expected to trigger increase in cost of credit or lending rates as well as increase the cost of doing business.

According to the Governor of the Bank of Ghana, Dr. Ernest Addison, the decision to adjust the policy rate upwards, is due to the current pressures on the economy, the uncertainty about the economic outlook and developments in Russia – Ukraine, which has pushed fuel prices up astronomically.

“The Sovereign credit rating downgrades of Ghana by Fitch and Moody’s led to widened yield spreads on both cedi-denominated Government of Ghana bonds and the country’s Eurobonds. These downgrades reflect market and investor concerns about fiscal and debt sustainability. Consequently, the Ghana Cedi has come under severe pressure as offshore investors exited positions in domestic securities at a time when domestic demand for forex has increased, reflecting both real and speculative demand. This has caused the exchange rate to overshoot its long-term trend. The strengthening of the US dollar, liquidity pressures, uncertainties regarding budget implementation, portfolio reversals by nonresidents and some speculative pressures are key contributory factors”, the Governor explained.

He further said “at this MPC meeting, the combination of tighter global financing conditions, sharp pressures on the exchange rate, and elevated inflation pose some policy challenges. Headline inflation has risen sharply to 15.7 percent in February 2022, and both headline and core inflation are significantly above the upper limit of medium-term target band. The uncertainty surrounding price developments and its impact on economic activity is weighing down business and consumer confidence.”

“The risks in the outlook for inflation are on the upside and include petroleum price adjustments and transportation costs, and exchange rate depreciation. The Bank’s latest forecast still depicts an elevated inflation profile in the near term, with inflation falling within the medium-term target band within a year”, he added.

Again, the Governor cited fiscal policy implementation which has come under strain, reflecting embedded rigidities in the fiscal framework and require extensive structural reforms to free fiscal space to restore both fiscal and debt sustainability, as reasons for increasing the policy rate, adding, “revenue performance has been slow to align with projections, while expenditure remains rigid downwards despite the strong efforts to cut expenditure by 20% as announced by the government.”

He concluded that the MPC is confident that ongoing discussions will lead to very decisive policy reforms that will address underlying fiscal mismatches and restore some calm in the markets, adding “this, together with the monetary policy decision and additional measures, should help re-anchor inflation expectations.”

BoG announces other measures

In addition to the upward policy rate adjustment, the Bank of Ghana with effect from April 1, 2022, enforce the following measures in relation to universal banks.

These are increased in cash reserve to 12%, whilst the Capital Conservation Buffer is reset to the pre-pandemic level of 3% making the Capital Adequacy Ratio a total of 13 percent.