Ghana Cuts Benchmark Rate as Inflation Slows and Cedi Gains

  • February inflation at 13.2% is lowest rate since November 2013
  • Country’s currency recovered from this year’s record lows

Ghana’s central bank cut its benchmark interest rate for a second time in four months as the cedi recovered from record lows and inflation slowed to the lowest rate in more than three years.

The Bank of Ghana reduced the rate to 23.5 percent from 25.5 percent, Governor Abdul Nashiru Issahaku told reporters Monday in the capital, Accra. That’s the biggest single cut in borrowing costs since February 2010. Four of the seven economists in a Bloomberg survey forecast the rate would be reduced while the remaining respondents said it would be kept unchanged.

“Underlying inflation pressures have eased considerably and inflation is projected to trend down towards the medium term target,” Issahaku said. Indications that growth is likely to remain significantly below potential and an improved inflation outlook provide “some scope for monetary policy easing,” he said.

The central bank reduced its key rate in November for the first time since May 2011 even as inflation has remained outside the central bank’s target band of 6 percent to 10 percent since at least January 2013. Price growth slowed for the fifth consecutive month in February to 13.2 percent, the lowest since November 2013. The cedi has recovered from record lows reached earlier this month and gained 8.3 percent since the beginning of March after Finance Minister Ken Ofori-Atta announced plans to narrow the fiscal deficit, which was 8.7 percent of gross domestic product in 2016. 

“We do not expect much impact on the foreign-exchange rate as a result of this move, as market interest rates had already adjusted, well in advance of the Bank of Ghana easing,” Razia Khan, head of Africa macro research at Standard Chartered in London, said in an emailed note. “In that sense it was very much a catch-up easing.”

The cedi weakened 1.2 percent to 4.35 per dollar by 12:23 p.m. in Accra on Monday.

Ghana’s two-month old government, led by President Nana Akufo-Addo, plans to boost spending even as it reduces taxes on goods including fuel. Gross domestic product in the world’s second-largest cocoa producer probably expanded 3.6 percent in 2016, according to government estimates, the slowest rate in more than two decades. The nation relies on an International Monetary Fund program of almost $1 billion to prop up its finances.

“It’s a signal to the market that the focus this year for the central bank is growth,” Yvonne Mhango, a Johannesburg-based sub-Saharan Africa economist at Renaissance Capital, said by phone. “Over the course of the year it should be positive for credit growth.”

— With assistance by Ana Monteiro

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