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Ghana’s central bank has raised interest rates by 300 basis points to 22 per cent, its largest increase since 2002, as it seeks to tame soaring inflation and a fast-depreciating local currency.
The rise was announced late on Wednesday after an emergency meeting of the bank’s monetary policy committee. The committee, which usually meets every two months, convened to address the “strong underlying inflationary pressures”, it said in a statement.
The move comes after the central bank unexpectedly held interest rates last month. The bank has bumped benchmark rates by 850 basis points since November, having previously held them at 13.5 per cent since 2015.
Economies in Africa had only begun to recover from the shock of Covid-19 when Russia’s invasion of Ukraine jeopardised their progress, according to the IMF’s most recent growth forecast for sub-Saharan Africa. Growth is expected to weaken in the region this year.
“Surging oil and food prices are straining the external and fiscal balances of commodity-importing countries and have increased food security concerns in the region,” the IMF said.
Elsewhere in the region, inflation in Nigeria has hit a 17-year high of nearly 20 per cent, driven by energy, transport and food costs.
Razia Khan, chief economist for Africa and the Middle East at Standard Chartered Bank said in a note that the Ghanaian move was “fully justified” as it was clear that inflation in Ghana was unlikely to slow soon.
Ghana’s inflation rose in July for the 11th consecutive month to 31.7 per cent, its worst level since November 2003. Food inflation stands at 32.3 per cent. According to the Ghana Statistical Service, the primary drivers of inflation last month were transport, housing and fuel costs.
Core inflation, which excludes energy and utility costs, quickened to 30.2 per cent, up from 28.4 per cent in June. The central bank’s inflation target is 6 to 10 per cent.
The cedi, Ghana’s currency, has lost more than 25 per cent of its value year on year and is the world’s second-worst performing currency behind the Sri Lankan rupee in 2022. The three major credit agencies have downgraded Ghana’s bonds to junk status.
The central bank, in its statement, said it would begin buying foreign exchange from mining and oil companies to shore up its reserves.
Ghana’s finance ministry recently began discussions with the IMF to secure a $3bn facility. It is a political blow for President Nana-Akufo Addo and his ruling New Patriotic party, who had earlier in the year resisted calls from the opposition to seek help from the Washington-based lender.
“A higher policy rate alone may not be sufficient to stabilise the currency in the very near term, but it will at least provide reassurance on the seriousness of Ghana’s negotiations with the IMF,” Khan of Standard Chartered said.
The committee also increased the primary reserve requirement of local banks from 12 to 15 per cent to be phased in over a period of three months from September 1.
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