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Bank of Ghana raises policy rate to 22%

Following the Central Bank’s emergency Monetary Policy Committee (MPC) meeting today, August 17, 2022, the prime rate was increased.

The BoG claims that the most recent rate was determined owing to Ghana’s present economic circumstances and the threats to the inflation outlook.

With the increase in the policy rate, it is anticipated that interest rates on bank loans to individuals and businesses will rise, raising the cost of production for firms.

The Central Bank’s increase in the policy rate is thought to be primarily a result of the nation’s rising inflation and increased pressure on the foreign exchange market due to the devaluation of the cedi.

According to the MPC’s statement, “Given the circumstances and taking into account the risks to the inflation outlook, the Committee agreed on a 300 basis point rise in the Monetary Policy Rate to 22 percent.”

The full statement is provided below:

Today’s extraordinary meeting of the Monetary Policy Committee (MPC) was held to discuss recent economic developments and evaluate risks to the outlook. The Committee considered the underlying causes after taking note of the increase in inflation during the month of July and the intensified pressures on the foreign exchange market. Below is a summary of the evaluation and significant factors that influenced the Committee’s choice of monetary policy stance:

1. The latest consumer price index release showed that the headline inflation accelerated further for the eleventh consecutive month to 31.7 per cent in July 2022, from 29.8 per cent in June 2022. This was driven by both food and non-food price pressures. Food inflation rose to 32.3 per cent in July 2022 from 30.7 per cent in June 2022. Similarly, non-food inflation increased to 31.3 per cent from 29.1 per cent in June 2022, contributing 55 per cent to the rise in headline inflation in July 2022.

2. The above developments have translated into relatively strong underlying inflationary pressures. The Bank’s core measure of inflation, defined to exclude energy and utility indices, increased to 30.2 per cent in July 2022 from 28.4 per cent in June.

4. Recent developments in the foreign exchange market showed elevated demand pressures, reflecting among others, continued heightening of uncertainties in the global economy, rising inflation in many advanced economies and the resultant coordinated tightening of monetary policy stance by major central banks. This has further tightened global financing conditions with significant implications for Emerging Markets and Developing Economies (EMDEs), especially for those with weak fundamentals.

5. The US dollar has strengthened against all major currencies. From the beginning of the year to date, the pound sterling has weakened against the US dollar by 12.4 per cent while the Euro has also weakened by 11.8 per cent. Countries similar to Ghana (Ghana’s peers) are all experiencing sharp depreciation to date. The Ghana cedi has depreciated by 25.5 per cent year-to-date, reflecting the Ghana-specific situation, including the challenging financing of the budget from both domestic and external sources, downgrading of sovereign credit rating, non-residents disinvestment in local currency bonds, and loss of reserve buffers.

6. The execution of the budget for the year has remained challenging. Revenue has not kept pace with projections and created financing challenges. In the absence of access to the international capital market and given the constrained domestic financing, central bank overdraft has helped to close the financing gap as reflected in the mid-year budget review. The Bank of Ghana is working with the Ministry of Finance to agree on a cap on the overdraft.

7. Whilst addressing the immediate financing problems, the ongoing policy discussions with the IMF are expected to address the underlying macroeconomic challenges, restore fiscal and debt sustainability, and provide sustainable balance of payments cushion.

8. Under the circumstances, and considering the risks to the inflation outlook, the Committee decided on a 300 basis points increase in the Monetary Policy Rate to 22 per cent.

Additional Measures

9. The Committee also took the following additional measures: a. Raise the primary reserve requirement of banks from 12 per cent to 15 per cent to be implemented in a phased manner: i. 13 per cent from 1 September 2022 ii. 14 per cent by 1 October 2022 iii. 15 per cent by 1 November 2022.

10. To boost the supply of foreign exchange to the economy, the Bank of Ghana is working collaboratively with the mining firms, international oil companies, and their bankers to purchase all foreign exchange arising from the voluntary repatriation of export proceeds from mining, and oil and gas companies. This will strengthen the central bank’s foreign exchange auctions.

On September 20–23, 2022, the Monetary Policy Committee (MPC) will meet again. The unveiling of the policy choice will end the meeting on Monday, September 26, 2022.

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