BoG increases policy rate to 17% to contain rising inflation …highest since November 2018

The Bank of Ghana (BoG) has increased the Monetary Policy Rate (MPR) by 250 basis points to 17 per cent from 14.5 per cent over concerns of rising inflation and unfavourable global economic conditions.

The latest hike in the MPC is the highest since November 2018 when the policy rate was increased to 17 per cent and the second since this year.

The MPR is the rate at which the BoG lends to commercial banks in the country and serves as the benchmark interest rate for onward lending to businesses.

Dr Ernest Addison, the Governor of the BoG, announced the new MPR after the 105th regular meeting of the Monetary Policy of Committee of the BoG, and said although the country’s growth momentum was strong, inflation had risen beyond the BoG’s medium-term target band by 5.7 per cent, hence the need to hike the MPR to contain rising inflation.

 “Notwithstanding the sustained growth momentum, rising food prices, upward adjustments in petroleum prices and its effect on transport fares, and exchange rate depreciation pass-through have pushed up inflation to 15.7 percent at the end of February 2022, 5.7 percentage points outside the medium-term target band,” he said.

Dr Addison said food inflation jumped sharply from 12.8 percent in December 2021 to 17.4 percent in February 2022, while non-food inflation jumped from 12.5 percent to 14.5 percent over the same period.

 “Also, underlying inflationary pressures have increased, signalling broad-based price pressures. The bank’s core inflation measure (defined to exclude energy and utility prices), increased from 11.8 percent in December 2021 to 13.6 percent in January 2022 and further up to 15.4 percent in February 2022. Similarly, weighted inflation expectations comprising consumers, businesses, and financial sector, also picked up significantly over the period,” he stressed.

He said the risks in the outlook for inflation were on the upside and include petroleum price adjustments and transportation costs, and exchange rate depreciation, pointing out that the bank’s latest forecast still depicted an elevated inflation profile in the near-term falling within the medium-term target band within a year.

On the global economy, the governor said MPC noted that the global economy had entered a period of profound uncertainty and fragility.

He said the Russia-Ukraine war had introduced new uncertainties which had complicated the outlook and aggravated the COVID-related supply bottlenecks, elevated inflation expectations, and triggered higher crude oil prices, compounding the already high global inflationary pressures.

“Global financing conditions have tightened as key central banks raised policy rates to counter rising inflation. The combined effect of these developments could lead to further downgrades in global growth projections, increase investor uncertainty, and lead to capital outflows from emerging and frontier economies with weak fundamentals and could have severe exchange rate implications,”  he said.

The Governor noted that the hike in the MPR would make cedi-denominated assets (investment) attractive to attract more foreign investors into the country’s market.

Dr Addison pointed out that the strengthening of the US dollar, liquidity pressures, uncertainties regarding budget implementation, portfolio reversals by non-residents and some speculative pressures were key contributory factors for the current depreciation of the cedi.

“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 governor said.

BY KINGSLEY ASARE

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