Ghana’s central bank said its Monetary Policy Committee (MPC) decided on Wednesday (July 9) to raise the policy rate by 100 basis points to 19% in a bid to contain inflationary pressures and realign interest rates in favour of domestic assets. At its previous meeting in April, the MPC left the policy rate unchanged at 18%, despite noting that risks to inflation remain high, following a 200bps hike at an emergency meeting in February that was aimed to limit a drop in the local cedi currency amid a widespread emerging market currency turmoil.

The Bank of Ghana (BOG) noted that the headline inflation rose to 14.8% in May 2014 from 13.5% at end-2013, with food inflation climbing to 8% from 7.2% and non-food inflation climbing to 20% from 18.1% over the period. It attributed the growth in consumer prices to pass-through effects of adjustments in domestic petroleum prices, increased utility tariffs and transportation costs, as well as to the depreciation of the local cedi currency.

The bank added that although inflation has slowed on a monthly basis, it continues to drift further away from the target band of 2pps above or below 9.5%, underpinned by cost-push factors alongside heightened inflation expectations by businesses and the financial sector. The inflation outlook is additionally pressured by persisting fiscal and exchange rate pressures, while other risks include the recent rapid growth in monetary aggregates such as credit to the private sector and money supply. Broad money (M2+) grew 30.8% y/y to GHS 22.8bn (USD 6.9bn) at end-May, while private sector credit soared 47.2% y/y to GHS 18.9bn at end-May.

BOG forecast that inflation would return to its target range by Q1 2015, compared to a previously expected date at the end of H1 2015.

Ghana is a major producer of oil, cocoa and gold, but its economy has been recently hit by the slide in commodities prices as well as by continuous power supply deficits, in addition to the governance issues. It needs to address large current account and budget deficits to restore investor confidence. This should help stabilise the cedi and in turn soften inflation.

BOG warned that the risks to the fiscal outlook have increased on account of underperformance of government revenues, the rising share of compensation of employees in domestic revenues and the increasing difficulty of raising financing from traditional sources. It stressed that fiscal consolidation would require a more aggressive stance in H2 2014 and the government must enhance revenue measures and rationalise expenditures to achieve the fiscal deficit target of 8.5% of GDP for the year.

On the positive side, the central bank predicted that that the proceeds from an upcoming cocoa syndicated loan and a Eurobond issue, estimated at almost USD 3bn, would support the exchange rate in the second half of the year. In addition, the onset of gas production in Q4 would help reduce the oil import bill. These developments are expected to help restore the gross international reserves to a minimum of 3 months of import cover.