The bank raised the policy rate by 250 basis points, or 2.5 percentage points, from 15.5 to 17.5%, the highest level since 2018.
The central bank has also withdrawn three stimulus measures used to protect banks from the COVID-19 pandemic, as part of a slew of policies aimed at bolstering the economy, combating rising prices for goods and services, and slowing the rate at which the cedi loses value against major international currencies.
Dr Ernest Addison, Governor of the Bank of Ghana, stated at a press conference in Accra on March 21, 2022, that the government’s plans to raise $2 billion from a consortium of local banks would help improve the country’s reserves and slow the rate at which the cedi was losing value against major currencies, particularly the US dollar.
The CRR is a percentage of a bank’s deposits that should be kept separate from lending, whereas the CCB is a portion of its capital that should be set aside to protect against risks.
Following the increases in the CRR and CCB, Dr Addison stated that the capital adequacy ratio (CAR), which measures the share of a bank’s capital set aside as a buffer against risks, would now revert to the pre-pandemic level of 13%, up from the current 12%.
He also stated that the provisioning rate for loans classified as other loans exceptionally mentioned (OLEM) would be reset to the pre-pandemic level of 10% in an effort to discourage lending and slow the rate of inflation.
Aside from the policy rate increase, which went into effect immediately, the governor, who also chairs the MPC, stated that the other measures would go into effect on Friday, April 1, this year.
The measures are intended to make borrowing more expensive in order to reduce the amount of money in the system and keep inflation low.
Dr. Addison described the measures as “bitter pills” that the economy needed in order to recover from its current difficulties.
Price pressures have increased as a result of rising fuel prices and a sharp drop in the value of the local currency, the Ghana cedi.
The fiscal deficit and debt-to-GDP ratio both increased to 9.7 percent and 80.1 percent, respectively, in 2021, prompting the government to call an emergency Cabinet meeting last week to discuss solutions.
While inflation peaked at 15.6% in February of this year, the cedi lost 14.6% of its value against the US dollar last week, according to BoG data.
Dr. Addison stated that, like any medicine given to a sick person, the policies would cause short-term hardships for the economy and the populace, but that they would eventually lift the economy out of the doldrums.
He cited the potential increase in the cost of credit to consumers and the private sector, a slowdown in economic growth, and an increase in the public debt due to higher interest rates on government securities as some of the unintended consequences of the measures announced.
The Chairman of the MPC stated that the bank was confident that the interventions would work in tandem with other fiscal measures announced by the Ministry of Finance to resuscitate the economy.
“The policy adjustments, as well as the fiscal policies that are being prepared, have the effect of withdrawing stimulus from the economy,” Dr Addison explained. “That type of policy should be able to impact aggregate demand and, thus, deal with the inflationary pressures that we are seeing.”
The governor also stated that fiscal policy implementation had become difficult, owing to structural rigidities in the fiscal framework.
He stated that the situation necessitated extensive structural reforms in order to restore fiscal and debt sustainability.
“Revenue performance has been slow to align with projections, while expenditure remains rigidly downward, despite the government’s strong efforts to cut expenditure by 20% as announced.” As a result of the foregoing, financing constraints have arisen, which must be resolved as soon as possible to ensure that the fiscal consolidation path announced is followed.
“However, the MPC is confident that ongoing discussions will result in very decisive policy reforms that will address underlying fiscal mismatches and restore some calm in the markets,” the statement said. Addison, Dr.
He added that the reforms, along with the monetary policy decision and additional measures, should help to re-anchor inflation expectations.
