Ghana’s central bank on Monday surprised analysts by raising its main interest rate to 29.5%, a sign the monetary committee does not yet see the country’s economic situation stabilising despite two consecutive months of slowing inflation.
The cocoa, gold and oil-producing nation, one of West Africa’s largest economies, is facing its worst economic crisis in a generation and is in the process of restructuring its debt in order to secure a $3 billion loan from the International Monetary Fund.
The central bank has hiked its main lending rate by 12.5 percentage points in the past year, from 17% in March 2022, in an effort to contain spiralling price rises, which reached a more than two-decade high of 54.1% in December.
“To place the economy firmly on the path of stability and reinforce the basis for disinflation, it is important that monetary policy stance is tuned firmer to re-anchor inflation expectations toward the medium target,” Bank of Ghana Governor Ernest Addison told a news conference.
Ghana’s consumer inflation slowed to 52.8% year-on-year in February, from 53.6% in January. Addison said on Monday he expected inflation to reach 29% by the end of the year.
Ghana secured a staff-level agreement through the International Monetary Fund in December for a $3 billion bailout loan, but must first ask bilateral lenders to provide financing assurances on existing debts before the IMF board can sign off on the programme.
Addison said on Monday that negotiations with those lenders were “proceeding well”, and that the Bank had finalised a zero financing agreement with the finance ministry for the 2023 budget, which was a prior action required by the IMF for programme support.
Addison also announced that commercial banks’ required reserve ratios would increase to 14% from 12% starting April 13, in the hope of ensuring banks maintain adequate liquidity in the aftermath of a domestic debt restructuring the country completed last month.
Some analysts were surprised by the rate hike.
“Given that the authorities had rejected higher bids at recent bond auctions, we expected the Bank of Ghana to remain on hold,” said Razia Khan, Standard Chartered’s Chief Economist for Africa and Middle East.
“However, the tightening by 150 bps signals some return to economic orthodoxy, reinforced by the intent to create a new MoU on zero financing of the deficit – and most likely – the demands of any IMF programme,” she added.
