BoG imposes record interest rate hike to curb inflation

Ghana will be hit by rising fuel and food prices following the war in Ukraine. Photo by Nipah Dennis/AFP via Getty Images

The central bank on Monday announced its biggest ever interest rate hike as it seeks to curb runaway inflation that threatens to create a debt crisis in one of Africa’s biggest economies. ‘Where is.

The Bank of Ghana (BoG) raised its main policy rate by 250 basis points to 17%, signaling an aggressive stance against soaring commodity prices, from flour to sugar to fuel, and against a local currency in depreciation, which has shaken investor confidence.

“Uncertainty surrounding price developments and their impact on economic activity is weighing on business and consumer confidence,” bank governor Ernest Addison told a news conference. “Inflation risks are on the rise.”

Ghana has long been seen as a rising star among Africa’s emerging market economies, but disappointing oil revenues and supply chain disruptions amid the Covid-19 pandemic have dampened expectations.

Consumer inflation hit 15.7% year-on-year in February, its highest level since 2016. Food, transport and housing prices saw the biggest increases. Read more

Restaurants and bakeries have reduced their menus and laid off staff. The National Union of Taxi Drivers has threatened to strike due to soaring fuel prices.

Baked bread from Bethel Brothers bakery is seen at a street vendor’s stall in Accra, Ghana March 8, 2022. REUTERS/Francis Kokoroko

The war in Ukraine is likely to make matters worse. Ghana imports nearly a quarter of its wheat from Russia and around 60% of its iron ore from Ukraine, Addison said, although it expects inflation to return to its target range of 8 % plus or minus 2% by the end of the year. .

Meanwhile, Ghana’s cedi has weakened around 20% against the dollar this year, making it the second weakest currency after the Russian ruble in a list of around 20 emerging market units tracked. by Reuters.

Addison blamed this in part on recent credit rating downgrades from ratings agencies Moody’s and Fitch, which he said have shaken investor confidence.

According to central bank figures, Ghana’s total public debt stands at $50.8 billion (351.8 billion Ghanaian cedi), or about 80% of the country’s gross domestic product.

The central bank has made efforts to improve the situation. Monday’s rate hike marks the first time it has raised the prime rate twice in a year since 2015, following a previous one in November.

Economists have warned that the budget deficit could trigger a debt crisis if more money does not flow.

Ghana’s ruling party says the solution lies in a 1.75% tax on all electronic payments, locally known as “electronic levy”, a proposal so hated by the opposition that it has caused a brawl in parliament last year.

Stephen V. Lee