Ghana Raises Key Interest Rate More Than Expected to 17%

Policymakers are forecasting high inflation in the near-term with price-growth expected to fall within its 6% to 10% target band within a year, Addison said in a decision that came a week earlier than originally planned. “At this MPC, the combination of tighter global financing conditions, sharp pressure on the exchange rate and elevated inflation posed some policy challenges,” he said.

The move comes as the cedi has been trading close to record lows against the dollar and inflation accelerated more than expected in February to 15.7%, a near six-year high. That meant it was breaching the top of the central bank’s target band for a sixth consecutive month, resulting in a negative real interest rate for the first time since the new consumer price index series was introduced in 2019. With the hike, the interest rate is now above inflation again, which is what Ghana prefers to attract investment flows. 

The cedi weakened 0.1% to 7.3625 per dollar by 4:34 p.m. in the capital, Accra, bringing its loss this year to 16%. The yield on the country’s dollar bond maturing in 2026 rose 68 basis points to 16%.

Policymakers also want to avoid adding more upside pressure to domestic market yields, after top ratings agencies cut the country’s long-term debt assessment further into junk territory, making its dollar-denominated loans less attractive to hold. The West African nation’s government debt has been trading at distressed levels, signaling that investors judge that re-financing debt in the Eurobond market won’t be an option when the U.S. Federal Reserve hikes rates. Budget targets also remain elusive.

The Finance Ministry, which started to combine all debt in November, has projected a unified deficit of 7.4% of gross domestic product for this year, compared with 12.1% in 2021. 

Read: Five African Central Banks Set to Hike Rates to Subdue Inflation

In a bid to reassure investors, the government said it’s willing to cut spendingby as much as 20%, depending on revenue performance, to stabilize public finances. Over the weekend, President Nana Akufo-Addo also approvedmeasures to mitigate the depreciation of the cedi and ensure expenditure discipline, the government said in a statement Monday. 

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

Details of government measures will be presented later this week, the statement said. They include a plan to raise up to $2 billion in syndicated loans from commercial banks, development financial institutions and multilateral lenders to fund the budget, according to people familiar with the matter. The move is expected to strengthen the cedi, the worst-performing currency in Africa this year.

The central bank of Africa’s top gold producer also bought more than 600 kilograms (about 21,000 ounces) of the metal to prop up the currency, Addison said. The so-called doré gold still needs to be refined before being considered part of the country’s foreign-exchange reserves, which stood at $9.5 billion at the end of February.