The Monetary Policy Committee (MPC) of the Bank of Ghana has – for the first time in recent history – hiked the policy rate by 250 basis points, saying current economic conditions which include fiscal pressures, inflation, and exchange rate volatility, among others, leave no room for deciding otherwise.
At the 105th meeting of the MPC, it decided to increase the policy rate to 17 percent from 14.5 percent, given inflation has shot through the upper-band target ceiling of 10 percent to 15.7 percent in February, and is expected to continue inching up due to rising fuel prices.
The local currency has of mid-March depreciated by 17 percent to the dollar, further contributing to the hike in the price of goods and services on the market due to the country’s heavy reliance on imports of goods and raw materials for local production.
Total public debt has also hit 80.1 percent of GDP, recording GH¢351.8billion as at the end of last year, an increase by GH¢60.2billion from the same period in 2020. These and other factors combined, the MPC said, left it with no option than to hike the policy rate to 17 percent; the first time since November 2018 when it was increased to such a level.
The rate, however, does not come as a surprise to the market at all, as various market watchers had prior to the meeting forecasted an increase of the rate by at most 200 basis points, given pressures in the economy.
“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 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. Fiscal policy implementation has come under strain, reflecting embedded rigidities in the fiscal framework which will require extensive structural reforms to free fiscal space to restore both fiscal and debt sustainability,” the MPC statement said.
It further stated that: “Revenue performance has been slow to align with projections, while expenditure remains rigidly downward, despite the strong efforts to cut expenditure by 20 percent as announced by government. The above have resulted in financing constraints which will have to be resolved very swiftly to ensure the announced fiscal consolidation path is achieved.
“The MPC is however confident that ongoing discussions will lead to very decisive policy reforms which will address underlying fiscal mismatches and restore some calm in the markets. This, together with the monetary policy decision and additional measures, should help re-anchor inflation expectations. Under these circumstances, the Committee has decided to increase the policy rate by 250 basis points to 17 percent.”
Other measures taken
Besides hiking the rate to contain inflation, the Committee added that, with effect from April 2022, the central bank will enforce some measures in relation to universal banks. These include increasing the Cash Reserve Ratio to 12 percent; resetting the Capital Conservation Buffer to the pre-pandemic level of 3 percent, thereby taking the Capital Adequacy Ratio to 13 percent; and also resetting the provisioning rate for loans in the Other Loans Exceptionally Mentioned (OLEM) category to 10 percent.
