The Monetary Policy Committee (MPC) of Ghana’s central bank lifted on November 12 the main policy rate by 200bps to 21% in view of persistently high fiscal pressures that could prevent inflation from scaling back within the target band.

“Weak revenue performance, rising debt service costs, large public sector wage bill, and outstanding payments owed to statutory funds constitute upside risks to the expected fiscal consolidation in the medium term,” the Bank of Ghana (BOG) said in a statement, adding that inflation will ease only if significant fiscal consolidation is achieved and the tight monetary policy stance maintained.

The move came as a surprise to markets, as most analysts had expected the rate to be kept on hold given the recent stabilisation of the local cedi currency and the ongoing negotiations with the IMF on a financial assistance programme that should result in a reduction of the wide budget and current account deficits.

With the current rate hike, the BOG has raised its policy rate by a cumulative 500bps this year. The latest hike was in July, while at the September meeting the rate was kept unchanged as the bank saw some stability in the foreign exchange market and left previous tightening measures work through the system.

Actually, the cedi has appreciated by some 15% against the US dollar since the beginning of August, when the government announced it would seek IMF aid in a bid to stabilise the country’s ailing economy, hit by the slide in commodity prices and continuous power supply deficits, in addition to governance issues. The proceeds from the $1bn Eurobond and the Cocoa Board’s (Cocobod’s) $1.7bn syndicated loan in September also supported the currency, which had lost 36% of its value in the first seven months of the year. Cumulatively, for the first 10 months of the year, the cedi depreciated by 31.2% against the US dollar, compared to 7.4% in the same period last year, the central bank said.

Pass-through effects of the depreciation of the cedi, are still pushing up prices of fuel, transport and imported food, boosting the annual CPI inflation to a new five-year high of 16.9% in October, well above the recently upwardly revised end-year target band of 2pps either side of 13%. The BOG said that its latest forecast indicates that inflation would remain higher than desired, but should ease gradually towards the medium-term target band of 2pps plus or minus 8% in the first half of 2016. It stressed that in the absence of significant fiscal consolidation and maintenance of the tight monetary policy, the inflation target could take more than three years to be achieved, considering the vulnerabilities in the economy.

The MPC also decided to set the interest rate corridor around the policy rate at 300bps, maintaining the reverse repo rate and the repo rate at 24% and 18%, respectively. In addition, it cut the cash reserve requirement by 100bps to 10%.