Ghana raises interest rates again as inflation climbs

A man exchanges U.S. dollars for Ghanaian cedis at a currency exchange office in Accra, Ghana June 15, 2015. REUTERS/Francis Kokoroko

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ACCRA, May 23 (Reuters) – Ghana’s central bank on Monday raised its main interest rate (GHCBIR=ECI) by 200 basis points to 19% to curb inflationary pressures and promote macroeconomic stability, the governor said. Ernest Addison.

In March, the Bank of Ghana raised its policy rate by 250 basis points to 17% – the biggest hike in its history – to stem runaway inflation in one of Africa’s most prosperous countries. West as the government cut spending to reduce the budget deficit and save a slippery local currency. Read more

But in April, the consumer inflation rate in the gold, oil and cocoa producer hit an 18-year high of 23.6%.

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“The committee felt it needed to decisively address the current inflationary pressures to re-anchor expectations and help foster macroeconomic stability,” Addison said at a press briefing in the capital Accra.

The rapid depreciation of the Ghanaian cedi has slowed, but the currency has still lost more than a quarter of its value since the start of the year.

Capital outflows fully offset a $1.3 billion trade surplus driven by a 61% jump in crude oil export earnings in the first quarter.

Addison said that created an overall balance of payments deficit of $934.5 million in the first quarter, compared to $429.9 million in the same period last year.

Although the jump in inflation in April was mainly due to transport costs, prices rose for more than 96% of the items surveyed, meaning most Ghanaians are feeling the pinch.

The central bank’s forecast shows an “extended horizon” for inflation to return to its target range, Addison said.

Finance Minister Ken Ofori-Atta had said another hike would be a “gut reaction” to mainly imported inflation, which would make it difficult for the government to service its domestic debt. Read more

Addison said total public debt stood at around 78% of gross domestic product and Ghana had been unable to access capital markets since both Fitch and Moody’s downgraded its sovereign credit rating at the start of This year.

Performance of selected JPM EMBI Diversified indices (rebased, over the last six months)

Although one analyst called Monday’s rate hike a “bold move”, it remains to be seen how much the recent hikes will bolster investor confidence. Ghanaian benchmark bond yields have hit 5-year highs since early May.

The benchmark 10-year Treasury yield rose to 25.913% on Monday from 24.625% at the end of last week.

“Although there was at least one further tightening, according to our calculations, the [real] policy rate is expected to remain negative for some time,” said Razia Khan, Standard Chartered’s chief economist for Africa and the Middle East.

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Reporting by Christian Akorlie and Cooper Inveen; Additional reporting by Rachel Savage; Editing by Sofia Christensen, Hugh Lawson and Emelia Sithole-Matarise

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