Ghana's central bank raised its policy rate by 200 basis points to 18.0 percent, more than expected by most analysts, because "the risks to inflation and exchange rate stability are highly elevated."
The Bank of Ghana, which has seen inflation accelerate despite a 100 basis point rate rise in May last year, said a reversal in capital flows following the start of tapering of asset purchases by the U.S. Federal Reserve had led to pressure on the cedi currency, lowering the real yield on cedi assets relative to foreign assets.
This has heightened inflation expectations, a situation that was also seen in the first half of 2012 when rate hikes by the central bank helped to restore stability, the bank said following an emergency meeting of its monetary policy committee. In 2012 the central bank raised its rate by 250 basis points.
"The uncertainties in the outlook and weakened domestic fundamentals underscore the need for continued tight fiscal and monetary policies and measures that would reduce the country's vulnerability to shocks, re-anchor inflation expectations and sustain macroeconomic stability," the bank said.
In addition to its rate rise, the central bank has issued new foreign exchange regulations, such as restrictions on foreign currency-denominated loans, to promote the use of the cedi as the sole legal tender along with a code of conduct in the foreign exchange market.
The central bank appealed to the government to strictly stick to its targets for fiscal consolidation and said in the medium to long term, the tax base has to be broadened, the export base has to be diversified and broadened, imports of consumption goods has to be reduced in favor of local substitutes and effort to block foreign exchange leakages have to be intensified.
Ghana's inflation rate has been rising for the last year, hitting a 2013-high of 13.5 percent in December, above the central bank's target of 9 percent, plus/minus 2 percentage points. In November the bank said upside risks to inflation from higher petroleum and electricity prices had crystalized but it expected inflation to track back toward its target by end-2014, helped by fiscal tightening.
But inflation expectations have risen and fiscal consolidation in 2013 was slower than expected due to lower-than-expected revenues, with the budget deficit estimated at 10.2 percent of Gross Domestic Product against a target of 9.0 percent.
The fiscal imbalance and external pressures led to a current account deficit of 12.3 percent of GDP in 2013, up from 12.1 percent in 2012 while gross international reserves ended at US$ 5.6 billion, the equivalent of 3.1 months of imports, compared with $5.3 billion end-2012. Cocoa and gold export recipes fell by $1.3 billion in 2013 from 2012.
The result is that Ghana's cedi has been under pressure, down 14.6 percent against the U.S. dollar in 2013. This depreciation has picked up pace in the last month, with the cedi down a further 7.8 percent during the month of January. Today the cedi was trading at 2.4 to the U.S. dollar.
Ghana's GDP expanded by only 0.3 percent in the third quarter from the same 2012 quarter.
www.CentralBankNews.info
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