Ghana's central bank held its policy rate steady at 18.0 percent as the February rate rise is still working its way through the economy but raised the cash reserve requirement of banks to 11.0 percent from 9.0 percent to address the overhang of liquidity and revised down the Net Open Position (NOP) limits of banks to improve the supply of foreign exchange on markets.
The Bank of Ghana, which raised its policy rate by 200 basis points in February in response to growing risks to inflation and exchange rate instability, said the single currency NOP limit was cut to 5 percent from 10 percent and the aggregate NOP cut to 10 percent from 20 percent.
"In assessing the outlook for inflation, the Committee noted that inflationary pressures have heightened, driven by period increases in fuel and utility prices, currency depreciation and supply-demand gaps in the general economy," the central bank said.
Ghana's headline inflation rate rose to 14.0 percent in February, continuing the rising trend since January 2013, and up from 13.8 percent in January.
News agency Reuters reported that the central bank governor, Henry Kofi Wampah, told a news conference that the inflation target for 2014 had been revised upwards to around 12 percent from 9.5 percent, plus/minus 2 percentage points. He did not spell out a 2015 target.
"The risks to inflation remains high," said the bank, adding that its latest forecasts show that inflation will only return to the target range towards the end of the first half of 2015.
Ghana's cedi currency, which fell 14.6 percent against the U.S. dollar in 2013, remains under pressure due to a wide current account deficit, fiscal imbalances and weak growth. In the first quarter of this year, the central bank said the cedi was down 17.6 percent against the dollar compared with a 1.1 percent decline in the first quarter of 2013. Today the cedi was trading at 2.68 to the dollar.
"Since the last MPC round, pressures observed from the exchange rate depreciation, fiscal strains and the pass through effects of fuel and utility price adjustments have persisted, heightening inflation expectations," the bank said.
In addition to raising its policy rate, the central bank in February also issued new foreign exchange regulations that it said had helped "to some extent" to slow down the pace of depreciation.
Ghana's economic growth is expected to remain below par this year, reflecting the lingering impact of last year's disruptions to the energy sector, falling gold production and prices. The central bank said it was also concerned about waning consumer and business sentiment and tightened credit conditions.
Ghana's Gross Domestic Product expanded by 0.5 percent in that third quarter of 2013 from the second quarter for annual growth of only 0.3 percent, down from 6.1 percent in the second quarter.
In February the International Monetary Fund estimated 2013 growth of 5.5 percent, well below an average 7 percent growth seen from 2001 to 2012.
"The strict adherence to 2014 budgetary estimates is critical for macroeconomic stability," the bank said, saying a lower deficit would create space for development spending, reduce borrowing and pressure on interest rates, helping boost international confidence and encourage capital inflows.
Revenue shortfalls, higher wage bills and interest rate costs boosted the 2013 fiscal deficit to an estimated 10.8 percent of GDP compared with a target of 9.0 percent and the 2012 deficit of 11.8 percent. The deficit was mainly financed by domestic sources.
Provisional data for January and February show a budget deficit of 1.8 percent, down from 2.7 percent in the same 2013 period, with government spending at 4.1 percent of GDP, below the 5.0 percent seen last year.
The large fiscal deficit contributed to a widening of the current account deficit to 13 percent of GDP, or US$ 5.7 billion in 2013 from $4.9 billion in 2012, and to further pressure on international reservers.
As of March 28, Ghana's gross international reserves were estimated at $4.7 billion, down from $5.6 billion and the end of 2013, representing 2.6 months of import cover.
Monetary aggregates show increased liquidity, reflected in higher currency in circulation and demand deposits, with the pace of growth in private sector credit steady at an annual 33.0 percent at the end of February. The ratio of non-performing loans in the banking sector eased to 12.7 percent in February from 13.5 percent in February 2013, while money market rates have trended up with 1-year notes up to 22.5 percent in February from 17 percent in December, reflecting the higher policy rate.
The only bright spot identified by the central bank was an expected improvement in the global economy that could improve commodity prices.
"While gold and oil revenues may be flat, cocoa revenue is expected to improve," the bank said, adding that cocoa prices are projected to rise to $3,200 per tone by the end of this year from the current price of $2,955.
The prices of Ghana's two major exports, cocoa and gold, have declined since 2011.
On the other hand, the bank said the prospects of faster tapering by the U.S. Federal Reserve coupled with evidence of slowdown in China and geo-political tensions from Ukraine could pose challenges to the global economic outlook.