Governor of Bank of Ghana, Dr Ernest Addison

The Monetary Policy Committee (MPC) of the Bank of Ghana has increased its Policy Rate – the rate at which it lends to commercial banks by 100 basis points (1%) to 14.5%, citing risks to inflation, exchange rate as well as fiscal and debt sustainability challenges.

It’s the first time since 2015 that the MPC has increased its key lending rate.

This is expected to trigger an increase in the cost of borrowing, but may help stem the recent pressures on the cedi and the price of goods and services.

“Headline inflation has risen consistently from the low of 7.5% in May 2021 to 11.0% in October driven by both food and non-food price increases. In addition, all the Bank’s core measures of inflation have increased, indicating broad-based underlying inflation pressures, with the potential of de-anchoring inflation expectations. Currently, headline inflation is above the upper limit of the medium-term target band and the Committee noted significant risks to the inflation outlook”.

“These risks include rising global inflation, high energy prices, uncertainties surrounding food prices and investor behaviour. The Committee further noted that these elevated inflationary risks, require prompt policy action to re-anchor inflation expectations to safeguard the central bank’s price stability objective. Given these considerations, the Committee therefore decided to raise the policy rate by 100 basis points to 14.5 percent”, the MPC detailed report stated.

The Central Bank further said the country’s sovereign bond spreads widened markedly over the period as investor sentiments shifted based on fiscal and debt sustainability concerns, prompting some sell-offs by investors with spillovers on the domestic foreign exchange market. This triggered some currency pressures in the past two months as demand for the U.S. dollar increased.

“However, the adequate reserve levels provided some buffers and supported a much slower depreciation pace compared with pre-pandemic levels. In the outlook, the Committee is of the view that the strong reserve buffer level should provide some assurance to the market and help abate investor concerns, as the country’s external payment position remains strong”, it pointed out.

On growth, the Bank of Ghana said the Committee assessed that the recovery in the real sector was progressing at a steady pace with high frequency economic indicators reflecting increased momentum in the pace of economic activity, close to pre-pandemic levels.

Again, consumer and business sentiments have turned around, driven by perceived improvements in economic prospects, although consumers expressed concerns about current household finances.

Interest rates trended downwards during the last quarter

Interest rates generally trended downwards over the review period on the money market.

The 91-day and 182-day Treasury bill rates declined to 12.5% and 13.2% respectively in October 2021, from 14.05% and 14.11%, respectively in October 2020. Similarly, the rate on the 364-day instrument decreased to 16.2% from 17.0% over the period.

Except for rates on the 3-year, 15- year and 20-year bonds which remained unchanged at 19.0%, 19.8% and 20.2% respectively, rates on the other medium to long-term instruments generally declined during the period.

On the secondary market, however, rates have started increasing across the spectrum of the yield curve. Similarly, on the interbank market, the weighted average rate declined to 12.7% from 13.6%, largely reflecting improved liquidity conditions, which transmitted to lending rates.

With regard to average lending rates of banks, it declined to 20.3% in October 2021 from 21.3% in October 2020, consistent with developments in the interbank market.

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