BoG increases policy rate to 17 per cent

The Monetary Policy Committee of the Bank of Ghana has raised its benchmark rate by 250 basis points to 17 per cent, citing inflationary pressures.

In addition to the upward policy rate adjustment, the BoG will, effective April 1, 2022, increase the Cash Reserve Ratio to 12 percent and reset the Capital Conservation Buffer to the prepandemic level of 3 per cent, making the Capital Adequacy Ratio a total of 13 percent.

Also, the provisioning rate for loans in the Other Loans Exceptionally Mentioned (OLEM) category is reset to the pre-pandemic level of 10 percent.

Dr Ernest Addison, the Governor of the Bank of Ghana, who announced the decision of the MPC at a press conference, said the Committee noted that the global economy had entered a period of profound uncertainty and fragility.

“The Russia-Ukraine war has introduced new uncertainties which have complicated the outlook and aggravated the Covid-related supply bottlenecks, elevated inflation expectations, and triggered higher crude oil prices, compounding the already high global inflationary pressures,” he said.

Headline inflation has risen sharply to 15.7 percent in February 2022, and both headline and core inflation are significantly above the upper limit of the medium-term target band of 8 per cent plus-or-minus 2% by the end of the year.

Dr Addison said the uncertainty surrounding price developments and its impact on economic the activity was weighing down business and consumer confidence.

“The risks in the outlook for inflation are on the upside and include petroleum price adjustments and transportation costs, and exchange rate depreciation. The Bank’s latest forecast still depicts an elevated inflation profile in the near term, with inflation falling within the medium term target band within a year,” he said.

Dr Addison said despite signs of the weakening consumer and business sentiments, the domestic growth conditions were fairly strong.

This is seen in the steady increase in private sector credit growth with positive growth implications, strong banking sector performance with sustained growth in total assets, investments and deposits.

Key financial soundness indicators such as profitability, liquidity and solvency remain healthy.

Asset quality improved slightly, although there are upside risks to the outlook, requiring continued monitoring to address early signs of stress within the sector.

On the depreciation of the cedi, Dr Addison said the Sovereign credit rating downgrades of Ghana by Fitch and Moody’s led to widened yield spreads on both cedi-denominated Government of Ghana bonds and the country’s Eurobonds.

“These downgrades reflect market and investor concerns about fiscal and debt sustainability. Consequently, the Ghana Cedi has come under severe pressure as offshore investors exited positions in domestic securities at a time when domestic demand for forex has increased, reflecting both real and speculative demand. This has caused the exchange rate to overshoot its long-term trend.”

The strengthening of the US dollar, liquidity pressures, uncertainties regarding budget implementation, portfolio reversals by non-residents and some speculative pressures are key contributory factors, he added.

Dr Addison said fiscal policy implementation had come under strain, reflecting embedded rigidities in the fiscal framework which would require extensive structural reforms to free fiscal space to restore both fiscal and debt sustainability.

Revenue performance has been slow to align with projections, while expenditure remains rigid downwards despite the strong efforts to cut expenditure by 20 percent as announced by the Government.

“The above have resulted in financing constraints which would have to be resolved very swiftly to ensure the announced fiscal consolidation path is achieved.

“The MPC is however confident that ongoing discussions will lead to very decisive policy reforms that will address underlying fiscal mismatches and restore some calm in the markets. This, together with the monetary policy decision and additional measures, should help re-anchor inflation expectations,” Dr Addison added.