Bank of Ghana Plans Rate Rise If Fuel Costs Weigh on Inflation

Ghana’s central bank is prepared to raise its key lending rate if an increase in fuel prices after the removal of subsidies adds pressure on inflation in West Africa’s second-biggest economy.

Ghana raised gasoline prices by 3 percent on June 1, the second increase this year, as the government cut subsidies to curb expenditure and narrow the budget deficit to 9 percent of gross domestic product this year from 12.1 percent in 2012. Other fuel costs were also lifted.

“We expect the removal of fuel subsidies to increase transportation costs and this in turn to feed through to inflation,” Grace Akrofi, head of research at the Bank of Ghana, said at a conference in Accra, the capital, today. “Monetary policy will stand present to step in. The central bank will increase the policy interest rate and mop up liquidity if inflation veers off our target.”

After keeping its key rate unchanged at 15 percent since June 2012, the institution on May 22 increased it to 16 percent, citing risks to inflation from higher fuel costs, fiscal spending and exchange-rate fluctuations. Its target for inflation by the end of the year is 9 percent.

The cedi weakened 5.1 percent this year against the dollar, adding pressure on consumer prices in the import-dependent economy. The rate accelerated to 10.9 percent in May, the highest since April 2010. The currency retreated 0.1 percent to 2.0075 per dollar by 2:15 p.m.

The government is still paying subsidies on kerosene and other products, said Alpha Welbeck, head of pricing at Ghana National Petroleum Corp. Fuel subsidies totaled 880 million cedis ($438 million) in 2012, said Edward Abrokwah, a Finance Ministry senior economist. The government stands to save 1 billion cedis this year if all subsidies are cut, he said.

Cutting the subsidies “will save on the foreign exchange used in importing oil which will help to stabilize the local currency,” Akrofi said. Oil imports account for 20 percent of the total value of the country’s imports, equivalent to 8.2 percent of GDP, she said.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE