Ghana Raises Benchmark Rate to 16% As Currency Weakens

The Bank of Ghana unexpectedly raised its benchmark interest rate by one percentage point to stabilize a weakening currency as inflation reached a three-year high.

The policy rate was lifted to 16 percent, Governor Kofi Wampah told reporters today in Accra, the capital. Five out of six economists surveyed by Bloomberg predicted the rate would remain unchanged at 15 percent, while Razia Khan, London-based head of African economic research with Standard Chartered Plc, expected a 100 basis-point increase.

The bank has “underscored its commitment to price stability,” Khan said in a note to clients. “It should have some impact on foreign-currency market confidence and stall some of the front-loading of foreign currency demand that has been a feature of the Ghanaian market recently.”

The cedi has depreciated 4.7 percent against the dollar this year as companies increased their demand for foreign exchange to pay import bills and repatriate profits. The currency has also come under pressure after the government posted a budget deficit of 12.1 percent of gross domestic product last year, almost double the target of 6.7 percent.

Inflation accelerated to 10.6 percent in April from 10.4 percent in March. In February, the government cut fuel subsidies, adding to pressure on inflation.

Inflation Risks

Risks to Ghana’s inflation rate include an increase in fuel costs, fiscal spending and exchange rate fluctuations, Wampah said. The trade deficit has widened as export revenue fell due mostly to declining commodity prices, he said.

“The combination of these factors have resulted in heightened exchange rate pressures,” Wampah said. “The inflation profile is therefore currently dislodged from trends over the recent past.”

The central bank increased its key rate by 2.5 percentage points last year and boosted Treasury-bill sales to help stabilize the cedi, which fell 14 percent against the dollar in 2012, making it Africa’s second-worst performer.

The cedi dropped 0.2 percent to 1.9943 per dollar by 2:23 p.m. in Accra. The yield on Ghana’s dollar bonds due October 2017 fell 7 basis points to 4.817 percent.

To contact the reporters on this story: Pauline Bax in Accra at pbax@bloomberg.net; Moses Mozart Dzawu in Accra at mdzawu@bloomberg.net

To contact the editor responsible for this story: Nasreen Seria at nseria@bloomberg.net

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