Ghana’s central bank wanted to raise the benchmark interest rate by more than 1 percentage point in a decision that surprised financial markets on Wednesday, Governor Kofi Wampah said.
The government’s fiscal austerity measures, agreed to with the International Monetary Fund as part of about $900 million in emergency loans, helped to convince policy makers to curb the increase, Wampah said in an interview at his office in the capital, Accra.
The monetary policy committee “felt that we needed more than 100 basis-point tightening, given the analysis that was done,” he said. “But then, because of the fiscal consolidation, we felt that will do part of the work. I wanted to come clearly on that. It was the fiscal consolidation that moderated the action we took.”
Policy makers raised the benchmark rate to 22 percent in a move that wasn’t predicted by any of the eight economists surveyed by Bloomberg. Wampah cited a weakening currency and a worsening inflation outlook as the main reasons for the action.
The cedi has plunged 25 percent against the dollar in the past year, the worst performer of 24 African currencies tracked by Bloomberg, while inflation accelerated to 16.8 percent in April.
Ghana is seeking to convince investors that the government can stick to its three-year fiscal plan agreed with the IMF. Finance Minister Seth Terkper said in an interview on May 12 that he is optimistic about meeting the budget deficit target of 7.5 percent of gross domestic product this year. The shortfall was 9.3 percent of GDP in 2014.
Investors are still doubtful of Ghana’s commitment to keep debt under control, contributing to higher bond yields and a weaker currency, Wampah said. Total public debt rose 16 percent to 88.2 billion cedis ($22.4 billion) in the first quarter, the MPC said on Wednesday, without giving reasons. The debt-to-GDP ratio stood at 65.3 percent.
The economy is more exposed to adverse global investor sentiment than in previous years, giving authorities more reason to stick to its pledges, the governor said.
“Now, we’re more open,” he said, sitting on a blue leather armchair in his office on the top floor of the central bank’s headquarters, overlooking fishing canoes on the Gulf of Guinea. “Anything we do is picked up immediately in the global markets. That alone makes it very critical that you perform, otherwise the market will punish you.”
Ghana’s reserves fell 14 percent from the beginning of last year to $4.84 billion at the end of April, reducing the buffers needed to cushion the economy against a crisis and contributing to the cedi’s depreciation.
The currency is “slightly undervalued,” although pressure on the cedi will continue because of the country’s big inflation differential with its major trading partners, Wampah said. The cedi weakened as much as 1.5 percent to 3.9750 per dollar, an all-time low, before paring losses to trade at 3.9350 as of 4:34 p.m. in Accra.
The government’s fiscal performance in the first quarter was positive and if the trend continues, sentiment should improve, he said. Revenue and grants were above target in the first three months of the year, while expenditure was less than planned and the government’s wage bill within budget, the MPC said in its statement on Wednesday.
Wampah joined the central bank in 1986 and was appointed governor in March 2013 after acting in the position for seven months previously. He has raised the benchmark rate by 700 basis points since then.