The Monetary Policy Committee (MPC) of the Bank of Ghana (BoG) yesterday increased the policy rate by 200 basis points (two per cent) to 19 from 17 per cent on the back of rising inflation.
Dr Ernest Addison, the Governor of the BoG, who chairs the MPC, said the policy rate was hiked to tame inflation and boost growth.
Ghana’s economy grew to 5.4 per cent in 2021 from 0.5 per cent in 2020 in the height of the COVID-19 pandemic.
He explained that inflation since April had stretched above the upper limit of the BoG medium-term target band of between six and ten per cent.
The country’s inflation rate shot up from 19.4 per cent in March to 23.6 per cent in April driven largely by increases in food prices.
Dr Addison said the heightened uncertainty surrounding the inflation dynamics had weighed heavily on the domestic environment and significantly depressed business and consumer sentiments.
“The inflation numbers show that while food inflation has accounted for the increases in inflation over the past year, the recent jump in April shows that relative price increases in the non-food sector is accelerating at a fast pace, which provides information on the extent to which prices are becoming embedded,” he said.
He stressed that “The Bank’s latest forecast shows a continued elevated inflation profile in the near-term, with a prolonged horizon for inflation to return to the target band. Inflation expectations by consumers, businesses and the banking sector have also heightened. The risks to the inflation outlook are on the upside, and emanate from availability of inputs for food production, imported inflation, continued upward adjustments in ex-pump petroleum prices and transportation costs, possible increases in utility tariffs, and potential wage pressures. The second-round effects of these administered price adjustments would further amplify inflation pressures in the outlook. “
Dr Addison explained that the Committee noted that since the last MPC meeting in March 2022, global headwinds have intensified, underpinned by the spillover effects of the Russia-Ukraine war and China’s zero-Covid policy.
He said the war had worsened pre-existing global supply chain disruptions, triggered food and energy price shocks, and further heightened uncertainty about global growth prospects.
The Governor indicated that the quick turnaround from accommodative policies that characterised monetary policy conduct in Advanced Economies over the past two years, and the slowdown in China’s growth were expected to adversely impact the macroeconomic outlook for most Emerging Market and Developing Economies.
Dr Addison said on the international front, global price pressures remained elevated, primarily due to escalating energy and other commodity prices, as well as the persistent and broadened supply chain bottlenecks.
As a result, he said headline inflation had not only breached the set targets across several Advanced and Emerging Market and Developing Economies, but also reached record high levels, not seen in several decades and in view of this policymakers in several Emerging Market and Developing Economies had moved towards policy tightening in response to rising inflation and currency pressures.
“These considerations show that with the strong rebound in growth and the closing of the negative output gap, the balance of risk is clearly on inflation. The MPC took the view that it needed to decisively address the current inflationary pressures to re-anchor expectations and help foster macroeconomic stability. On the basis of the above assessment, the Committee decided to raise the policy rate by 200 basis points to 19.0 percent,” Dr Addison said.