Bank of Ghana Raises Key Rate to 2004 High to Support Cedi

Ghana’s central bank raised its benchmark interest rate to the highest since 2004 to tame inflation and arrest the slide in Africa’s worst-performing currency.

The Bank of Ghana increased the key rate by 1 percentage point to 19 percent, Governor Kofi Wampah told reporters in Accra, the capital, today. That was in line with the forecasts of four of the seven economists surveyed by Bloomberg News. The other three said policy makers would hold the rate at 18 percent. Borrowing costs were at 20 percent in February 2004.

The currency of the world’s second-biggest cocoa producer has weakened 29 percent against the dollar this year, the most among 24 African nations tracked by Bloomberg. The cedi’s depreciation drove inflation higher to 15 percent in June, the statistics office said today.

“The fiscal and exchange rate pressures have provided impetus for worsening inflation outlook,” Wampah said. “The exchange rate and decline in the price of major commodity prices are expected to have adverse consequences for the domestic economy.”

Moody’s Investors Service cut Ghana’s credit rating on June 28 by one step to B2, five levels below investment grade, citing a budget gap it estimated will exceed 10 percent of gross domestic product for a third year in 2014.

The cedi curbed losses of as much as 1.1 percent after today’s rate decision. The currency was unchanged at 3.335 per dollar at 3:45 p.m. in Accra.

Fiscal Consolidation

“It is no longer clear that further monetary tightening will help in the absence of meaningful fiscal consolidation,” Razia Khan, London-based head of Africa research at Standard Chartered Bank Plc, said in an e-mailed comment today. “It maintains some credibility of the Bank of Ghana, but it does not impact many real variables in the economy.”

The government budget gap in the five months through May was 3.9 percent of GDP as revenue and grants were below target, Wampah said. Gold exports, the largest source of foreign income, fell to $1.8 billon during the period from a year earlier, and oil dropped to $1.6 billion, he said. The central bank said it financed the government’s entire fiscal deficit in the first quarter and some of it in the second quarter.

“The rise in the monetary policy rate is likely to be too little too late,” Angus Downie, London-based head of economic research at Ecobank Transnational Inc., said in an e-mailed response to questions. “We expect the cedi will continue to weaken further. Until spending is better controlled and revenues strengthen, liquidity levels will remain elevated, which in turn will undermine the cedi.”

The sale of a Eurobond this quarter and money from the annual cocoa loan will help raise about $3 billion, Wampah said.

That “will provide some significant support for the market in the second half of the year,” he said.

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