Five reasons why the policy rate was raised to 25%

by Jerome Kuseh

dr-kofi-wampah-governor-of-bog
BoG Governor, Dr Kofi Wampah. PHOTO: kapital971.com

In a press release the Monetary Policy Committee (MPC) of the Bank of Ghana (BoG) announced the increase in the policy rate (the rate at which it lends to banks) to 25% from 24%. The increase in the rate came as a surprise to many analysts as they  expected the BoG to maintain the rate. I had expected the BoG to maintain the rates since growth in the economy was slow.

From the press release, there were five main reasons why the BoG raised the rate.

High inflation

Inflation for August was 17.3%. Lower than the 17.9% recorded in July but still too far from the medium term target of 8% (plus/minus 2%). The raise of the policy rate is meant to reduce the money supply and control inflation.

Planned increase in utility tariffs

This is related to the first point. The BoG expects utility tariffs to go up and the hike in the interest rate is to ensure that the effect of this increase will not immediately shoot inflation up.

Depreciation of the cedi

The value of the cedi continues to fluctuate against major currencies. The BoG reports a cedi appreciation of 25.5% against the dollar in July and a depreciation of 14.8% in August. The hike in interest rates is to soften the pressure on inflation from the depreciation of the currency.

Uncertainty about US interest rates

The Federal Open Market Committee (FOMC) of the US Federal Reserve has chosen not to increase the federal funds rate. This decision is good news since a rise would have sent investors fleeing emerging economies for the safety of US debt. The BoG had considered the possibility of the Fed raising their rate in their decision.

Falling commodity prices

The decline in commodity prices means that Ghana gets less money for its exports and unless imports also reduce, its balance of payments position would worsen. According to the BoG exports for the first 7 months of 2015 was US$6.3 billion, down from US$8.1 billion for the same period last year. Imports were US$7.8 billion, down from US$8.4 billion last year. The policy rate hike would help check the inflation from the worsened trade deficit.

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Jerome Kuseh

Accountant | Economist-in-Training | Private Investor
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