Business News of 2014-07-13

BoG increased interest rates but cedi never rest falling

The Bank of Ghana on Wednesday raised interest rates by 100 basis points to 19 per cent from 18 per cent as it seeks to halt the decline of the local currency. The increase was also to contain inflationary pressure and save the cedi, while calling for a tougher government action to stabilise the economy.

At the Interbank rate, the currency was 0.5 per cent lower at GH¢3.36 per dollar in Accra as at 4.30 p.m. Years of rapid economic growth and political stability have improved Ghana's reputation, but the government is battling fiscal instability, including a high budget deficit, inflation and a currency that has depreciated 30 per cent this year.

The Central Bank Governor, Dr Henry Kofi Wampah, said at a news conference in Accra that the bank's Monetary Policy Committee (MPC) viewed the risks of inflation as elevated.

The increase in the MPC’s Policy Rate, which signals interest rate trends, is the second time this year that the Central Bank has moved to tighten its monetary policy in a bid to control inflationary pressures expected from the recent increase in utility tariffs and transportation costs, as well as the depreciation of the cedi.

Annual consumer price inflation rose to a four-year high of 15.0 per cent in June from 14.8 per cent in May. "The persisting fiscal and exchange rate pressures have provided additional impetus for the worsening inflation outlook," he said.

Other risks related to the inflation outlook include the recent rapid growth in monetary aggregates such as credit to the private sector and money supply. That figure pushed inflation further beyond the 2014 target of 9.5 per cent, plus or minus two per cent, and it is not likely to return to its target range before the fourth quarter of 2015, Dr Wampah said. He urged the government to take a firm policy stance.

"Fiscal consolidation will require a more aggressive stance in the second half of 2014. Government must continue to enhance revenue measures and rationalise expenditures to achieve the fiscal deficit target of 8.5 pct of GDP," he said. The macro-economic problems have stirred a policy debate, and Moody's agency last month cut its sovereign rating for Ghana, citing the instability.

For its part, the government says it will announce a series of fresh policies soon and has already taken tough measures, including cuts to fuel and utility subsidies in 2013, and that it will achieve its objective of reducing the deficit under a multi-year programme.

It also says the medium-term prospects of the economy are bright, particularly once fresh oil revenues come on stream as production rises. The government held a strategic planning meeting at Senchi in the Eastern Region in May but is yet to announce new reforms.

Instead, it is urging patience and pointing to measures to tighten foreign exchange rules and raise rates, coupled with subsidy cuts last year.