Rising Inflation Pushes Bank of Ghana to Raise Policy Rate

Dr Ernest Addison, Governor of BoG

Accra, Ghana//-Rising inflation has pushed the Monetary Policy Committee (MPC) Bank of Ghana (BoG) to raise its policy rate by 100 basis points to 14.5 %.

This the first time of hiking the rate after it was lowered from 16% on the account of coronavirus (COVID-19) pandemic on March 18, 2020.

Analysts had predicted that the MPC could hike the policy rate from 13.5% because of the rise in inflation for the month of October 2021to 11.0%.

Explaining the decision, the Chairman of MPC and Governor of BoG, Dr Ernest Addison, said: “Headline inflation has risen consistently from the low of 7.5 percent in May 2021 to 11.0 percent in October driven by both food and non-food price increases.

In addition, all the Bank’s core measures of inflation have increased, indicating broad-based underlying inflation pressures, with the potential of de-anchoring inflation expectations”.

Currently, headline inflation is above the upper limit of the medium-term target band and the Committee noted significant risks to the inflation outlook. These risks include rising global inflation, high energy prices, uncertainties surrounding food prices and investor behaviour”.

The Committee further noted that these elevated inflationary risks, require prompt policy action to re-anchor inflation expectations to safeguard the central bank’s price stability objective, he noted.

The policy rate is the rate at which the central bank lends to the commercial banks in the country. With the increase of the rate, it implies that all the commercial banks are expected to raise their interest rates in the country.

On the interbank market, the weighted average rate declined to 12.7% from 13.6%, largely reflecting improved liquidity conditions, which transmitted to lending rates.

Average lending rates of banks declined to 20.3% in October 2021 from 21.3% in October 2020, consistent with developments in the interbank market.

Reviewing the health of the Ghanaian economy for the first 10 months, Dr Addison said the economic activity during the third quarter continues to point to sustained recovery from the pandemic.

The Bank’s updated Composite Index of Economic Activity (CIEA) recorded an annual growth of 11.2 percent in September 2021, compared with 10.8 percent and 4.2 percent in the corresponding periods of 2020 and 2019, respectively.

The stronger growth in the CIEA was driven by domestic VAT, industrial consumption of electricity, port activity, imports, and air-passenger arrivals.

Construction activities, however, slowed down somewhat. The results of the latest confidence surveys signalled continued improvement in both business and consumer sentiments.

Businesses met short-term company targets and were optimistic about company and industry prospects as the yuletide approaches, despite concerns about high cost of raw materials and exchange rate depreciation. Similarly, consumer confidence improved on account of positive economic prospects.

African Eye Report