Ghana's central bank raised its benchmark interest rate by a further 100 basis points to 19.0 percent, as expected, saying the risks to inflation were elevated and the increase should "contain inflation pressures and realign interest rates in favor of domestic assets."
It is the second rate rise this year by the Bank of Ghana, which also raised its rate in February by 200 basis points to curb inflationary pressures and stabilize the foreign exchange market.
In April the central bank raised the cash reserve requirement by 200 basis points and revised down the Net Open Position (NOP) of banks to improve the supply of foreign exchange on markets.
Inflation in Ghana rose to 15.0 percent in June from 14.8 percent in May, with the rise in inflation mainly reflecting the impact of higher domestic petroleum prices, increased utility tariffs and transportation costs and the depreciation of the cedi currency. Inflation expectations by businesses and the financial sector have also risen, the central bank said.
"The persisting fiscal and exchange rate pressures have provided additional impetus to the worsening inflation outlook," the central bank said, with further risks from the recent rapid growth in credit to the private sector and the money supply.
The central bank forecast that inflation is likely to return to the central bank's target range of 9.50 percent, plus/minus 2 percentage points, by the last quarter of 2015.
In April the central bank's governor was quoted as saying he expected inflation to return to the target towards the end of the first half of next year.
The cedi currency fell 14.6 percent against the U.S. dollar in 2013 and pressure has continued so far this year though it has stabilized since July 1.
The cedi was trading at 3.02 to the dollar today, steady since the end of June but down by 26.7 percent in the first half of the year compared with depreciation of 3.4 percent in the same period of 2013, the central bank said.
"The pressure are of major concern due to the adverse consequences of the depreciating currency on the economy," the central bank said, adding that it expects support for the foreign exchange market in the second half of the year due to almost US$3 billion in proceeds from the cocoa syndicated loan and a Eurobond issue.
Gas production in the fourth quarter should also help reduce the oil import bill, helping restore Ghana's international reserves to a minimum of 3 months of import cover, the bank said.
Ghana's Gross International Reserves (GIR) fell to $4.5 billion at the end of June, equivalent to 2.5 months of imports, down from $5.6 billion at the of December 2013.
The central bank said the government needs to put in place policies that will broaden the country's export base and expedite the promotion of specific exports and import substitutes. New oil and gas fields coming on stream in the second half of 2016 should help the medium-term outlook.
Economic growth in Ghana has eased but remains positive, the bank said, noting downside risks to the outlook from weaker business and consumer confidence, energy sector constraints and rising input costs. But higher private sector credit growth, improved cocoa production and expedited addition of gas to the economy should provide some boost to growth in the latter part of 2014.
Ghana's Gross Domestic Product expanded by 2.6 percent in the first quarter of this year from the previous quarter for annual growth of 6.7 percent, up from 4.9 percent, but down from 9 percent in the first quarter of 2013.