Raising Ghana’s key interest rate this week was intended to shield the economy from capital outflows prompted by Federal Reserve tapering, Ghana’s finance minister said. The cedi declined to a record.
The central bank, led by Governor Kofi Wampah, raised the policy interest rate by 200 basis points yesterday to 18 percent, the highest in more than four years and the biggest jump since at least January 2003, when Bloomberg began compiling the data. The move came a day after it announced curbs on foreign-currency trading to halt a slide in the cedi, Africa’s worst performer this year against the dollar.
“The decision is not an exaggeration of events,” Minister Seth Terkper told reporters in Accra, the capital. “As a result of Fed tapering, there have been capital flows away from emerging markets. There are fallouts that have been observed in countries like Turkey, Argentina, Indonesia, India, Malaysia, South Africa.”
Central banks in Turkey, South Africa and India unexpectedly raised rates last month to stem a slide in their currencies. The cedi has lost 5.4 percent against the dollar this year, the worst performer among 24 currencies in Africa tracked by Bloomberg. It depreciated 3.9 percent to 2.5100 per dollar by 5:05 p.m. in Accra, the lowest since at least May 1994.
The Bank of Ghana is reviewing its foreign-exchange laws and will present them to the cabinet later this year, Terkper said. The ministry has already asked government agencies to stop charging in dollars for services and halt taking loans in foreign currencies, he said.
The higher interest rate probably won’t be enough to stem the cedi’s slide “in the absence of accelerated fiscal consolidation to address growing domestic macroeconomic imbalances,” Fitch Ratings, which lowered Ghana’s creditworthiness one step to B in October, said in an e-mailed note today. Ghana’s current-account deficit, the broadest measure of trade in goods and services, widened to 12.3 percent of gross domestic product in 2013 from 12.1 percent a year earlier.
The bank’s measures “must be reinforced by ensuring that all the budgetary targets are strictly adhered to, for fiscal consolidation,” Wampah said yesterday.
Yields on the country’s Eurobonds due August 2023 rose a second day, adding three basis points, or 0.03 percentage point, to 9.01 percent.