CEM REPORT | The Bank of Ghana has raised its benchmark interest rate by 300 basis points to 22 per cent in its latest effort to combat the country’s rising inflation.
This is as the Ghanaian cedi has weakened 36.3% this year, dropping 15th straight week, which has placed the currency as the world’s worst-performing currency after Sri Lanka’s rupee according to Bloomberg’s analysis.
The Monetary Policy Committee also decided to hike the primary reserve requirement of banks to 15% from 12%, to be implemented gradually from September 1 to November 1.
The West African nation’s headline inflation in July rose to 31.7 percent, from 29.8 percent in June, the 11th consecutive month of increase. Food inflation rose to 32.3 per cent in July from 30.7 per cent in June 2022.
“The Monetary Policy Committee (MPC), today held an extraordinary meeting to review recent developments in the economy and assess risks to the outlook. The Committee took note of the increase in inflation in July and heightened pressures in the foreign exchange market and deliberated on the underlying drivers.”
“The Ghana Cedi has depreciated by 25.5 percent 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.
“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%.”
The bank said it intends to raise foreign exchange from the mining and oil firms to boost its forex reserves.
“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.”
Furthermore, the bank revealed that execution of the country’s national 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.”
Ghana’s Misery Index climbed to 60.8 in July nearly double the scores recorded at the end of 2021 (31.51), while economic misery worsened by a mouth-watering 92.9%.
the Ghanaian cedi has dropped by a whopping 53.71 % against the US dollar since the start of the year, as of the time of filing this report.
Despite efforts by the central bank to contain the increasing inflation, the purchasing power of Ghanaians has continued to decline.
Although, price pressures are expected to start easing as Ghana approaches its harvest season and the cost of wheat and other global commodities declines.
A major cause of depreciation of the currency can be linked to the conflict between Russia and Ukraine, which has had a substantial impact on Ghana’s exchange rate, particularly in the construction, agriculture, and international trade sectors.
Russia and Ukraine for around 2.5% of Ghana’s total non-oil imports and 0.4% of Ghana’s total exports.