Ghana's central bank raised its policy rate by 100 basis points to 16.0 percent, saying the growing risks to the inflation outlook outweighed the risks to economic growth.
The Bank of Ghana, which raised its rate 250 basis points last year in response to rising inflation, said inflation in April rose for the third month in a row, pushing up the bank's central path of its forecast by a percentage point.
In addition to its rate rise, the central bank said it was realigning its policy corridor by widening the band. The reverse repo rate will now be 200 basis points above the policy rate while the repo rate will be 100 points below it. The bank also plans to introduce a "informal standing facility" to improve the transmission mechanism of its monetary policy.
The central bank said the major upside risks to its inflation outlook were heightened inflation and exchange rate expectations, lingering fiscal pressures, challenges in the energy sector, the effect of weakened commodity prices on the external sector, and the likelihood of full cost recovery in the energy sector.
In April Ghana's inflation rate rose to 10.6 percent from 10.4 percent in March, highest since May 2010, due to the continued effect of upward adjustment in petroleum prices in February.
"Food prices continue to pose significant near-term risk to the inflation outlook. The inflation profile is therefore currently dislodged from trends over the recent past," the central bank said.
The central bank had earlier been optimistic about achieving its year-end target of 9.0 percent inflation, plus/minus 2 percentage points.
Ghana's trade deficit has widened further due to lower international commodity price, which have fed through to lower export earnings, resulting in heightened exchange rate pressures. Ghana is the world's largest cocoa producer.
Through mid-May from January, Ghana's cedi currency has depreciated by 2.3 percent against the U.S. dollar, while in the first quarter the real exchange rate had risen by 5.9 percent.
Gross international reserves eased to US$ 5.2 billion at the end of April, the equivalent of 2.9 months of imports, down from US$ 5.4 billion at the end of December.
The central bank said the pace of domestic economic growth was weakening, with business and consumer sentiment about growth softening "amid heightened inflation expectations." The growth of credit to the private sector had also moderated.
Ghana's Gross Domestic Product expanded by 2.1 percent in the fourth quarter of 2012 from the third for annual growth of 6.0 percent, down from 7.0 percent in the third quarter, the lowest growth rate since second quarter of 2010.
Growth in 2012 eased to 8.0 percent from 2011's rapid pace of 15 percent as oil came on stream.