By Elorm Desewu
The speed depreciation of the fiat currency, the cedi and sharp rise in year on year inflation have compelled the Monetary Policy Committee, (MPC) of the Bank of Ghana to hike the policy rate by 300 basis points to settle at 22 percent from 19 percent.
This means that cost of credit to households and the private sector would rise steadily in the next couple of months.
But in a swift attempt to stem the rising inflation as well as the speed depreciation of the cedi, the BoG has raised the primary reserve requirement of banks from 12 percent to 15 percent which is to be implemented in a phased manner: i. 13 percent from 1 st September, 2022 ii. 14 percent by 1st October, 2022 iii. 15 percent by 1st November, 2022
Additionally, to boost the supply of foreign exchange to the economy, the Bank of Ghana is working collaboratively with the mining firms, international oil companies, and their bankers to purchase all foreign exchange arising from the voluntary repatriation of export proceeds from mining, and oil and gas companies. This will strengthen the central bank’s foreign exchange auctions.
According to the BoG, the Ghana Cedi has depreciated by 25.5 percent year-to-date, reflecting the Ghana specific situation, including the challenging financing of the budget from both domestic and external sources, downgrading of sovereign credit rating, non-residents disinvestment in local currency bonds, and loss of reserve buffers.
The US Dollar has strengthened against all major currencies. From the beginning of the year to date, the pound sterling has weakened against the US dollar by 12.4 percent while the Euro has also weakened by 11.8 percent. Countries similar to Ghana (Ghana’s peers) are all experiencing sharp depreciation to date.
Recent developments in the foreign exchange market showed elevated demand pressures, reflecting among others, continued heightening of uncertainties in the global economy, rising inflation in many advanced economies and the resultant coordinated tightening of monetary policy stance by major central banks. This has further tightened global financing conditions with significant implications for Emerging Markets and Developing Economies (EMDEs), especially for those with weak fundamentals.
The latest consumer price index release showed that the headline inflation accelerated further for the eleventh consecutive month to 31.7 percent in July 2022, from 29.8 percent in June 2022. This was driven by both food and nonfood price pressures.
Food inflation rose to 32.3 percent in July 2022 from 30.7 percent in June 2022. Similarly, non-food inflation increased to 31.3 percent from 29.1 percent in June 2022, contributing 55 percent to the rise in headline inflation in July 2022.
The above developments have translated into relatively strong underlying inflationary pressures. The Bank’s core measure of inflation, defined to exclude energy and utility indices, increased to 30.2 percent in July 2022 from 28.4 percent in June.
On month-on-month basis, headline inflation rose by 3.1 percent in July 2022 compared with 3.0 percent in June 2022. The increase in monthly inflation was underpinned by increases of 3.3 percent and 3.0 percent in food and non-food inflation respectively.
