Central Bank increases interest rate by 100 basis points

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Bog Governor
BoG Governor

The Monetary Policy Committee of the Bank of Ghana has increased the Policy Rate by 100 basis points (1 per cent) to 28 per cent, citing the need to drive inflation downwards.

“In the interim, the MPC sees the need to remain vigilant and moderate liquidity in the system to underpin macroeconomic adjustments taking place to drive inflation on a downward path,” the Governor of the Bank of Ghana, Dr Ernest Addison, told a press conference on Monday.

Dr Addison said domestic growth conditions, which softened in 2022, were projected to moderate further and remained below potential over the near-term, based on the elevated inflation levels.

The rate of inflation touched a high of 54.1 per cent in December, spurred by food inflation.

The updated Composite Index of Economic Activity (CIEA) contracted by 6.2 percent in November 2022, compared with a growth of 10.2 percent in the same period of 2021.

Dr Addison said the CIEA showed continued dip in economic activity, despite the slight improvement in consumer and business sentiments from the latest surveys. In nominal terms, credit to the private sector rose sharply, but was moderated in real terms by price pressures.

The Governor said emerging signs showed that the current macroeconomic conditions were spilling over to the banking sector.

For instance, he said, profitability levels had declined alongside other financial soundness indicators.

Profitability levels in the banking sector have declined, driven by the mark-to-market losses on investments, higher impairments on loans, and rising operating costs. Profit-after-tax was GH¢3.9 billion at end December 2022, representing 18.9 percent contraction year-on-year, compared to 12.3 percent annual growth recorded in 2021.

“The latest macro-prudential risk assessments indicated increased pressure on solvency and liquidity of banks ahead of the implementation of the Domestic Debt Exchange Programme. To moderate the potential impact on the sector, the Bank of Ghana has announced some regulatory reliefs for banks to help preserve financial stability.

He said the Government’s Staff Level Agreement (SLA) with the IMF spelt out measures to put the fiscal on the path of consolidation.

Consistent with the SLA was the 2023 Budget which has just been passed by parliament and frontloads the consolidation efforts, he said.

Revenue enhanced measures such as the VAT increase of 2.5 percent, the complete removal of benchmark values on imports, and the review of the E-Levy should help improve the revenue outlook, the Governor added.

On the expenditure side, the lower capping on transfers to earmarked funds from 25 to 17.5 percent, and the reduction of budgetary allocation to goods and services, as well as rationalisation of executive compensation should help contain expenditures in 2023.

“The concerns being expressed in the public domain relating to high government expenditures have been addressed in the SLA and reflected in the 2023 Budget,” he said.

The SLA is also contingent on the Domestic Debt Exchange Programme and external debt restructuring, which when concluded and the necessary financial commitment obtained, will allow the presentation of the SLA to the IMF Board.

“The MPC believes that these measures will help restore fiscal and debt sustainability and bring down inflation as well as help stabilise the currency,” he said.

In 2022, the country’s trade surplus more than doubled to US$2.8 billion compared with US$1.1 billion in 2021, driven by higher exports growth, relative to the growth in imports.

Total exports increased by 18.2 percent year-on-year to US$17.4 billion, driven by crude oil, gold and other exports earnings. This compares with US$14.7 billion export earnings recorded in 2021.

At the end of December 2022, the stock of Gross International Reserves stood at US$6.2 billion (equivalent to 2.7 months of import cover) from a stock position of US$9.7 billion (equivalent to 4.4 months of import cover) at the end of December 2021.

The Net International Reserve position stood at US$2.4 billion, from US$6.1 billion over the same comparative period.

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