Desperate Times, Desperate Measures
BMI View: The 200bps rate hike and new rules for foreign exchange will have a negative impact on real GDP growth in Ghana. We are unconvinced that the moves will arrest the decline of the cedi, but we do expect the pace of depreciation to slow.
The Bank of Ghana's (BoG) decision to hike interest rates by 200 basis points (bps) to 18.00% on February 6 was indicative of the strong downside pressure on the cedi (see 'GHS: Further Heavy Depreciation Ahead', February 4). It was enacted at an emergency meeting of the Monetary Policy Committee (MPC), and the decision was based on 'highly elevated' risks to inflation and exchange rate stability. Inflation rose sharply in the final months of 2013, reaching 13.5% year-on-year (y-o-y) in December, owing mainly to a combination of past currency weakness and sharp hikes in utility tariffs in September 2013. The MPC feared that the recent bout of cedi weakness - the currency has depreciated by over 4.0% since the start of 2014 - would exacerbate inflation and instability and acted in an attempt to stem the depreciation.
The move followed hot on the heels of a new central bank directive, issued on February 4, which laid out several rules regarding the use of foreign exchange. Among other things, BoG specified that:
A Sharp Hike Ghana - Inflation & Interest Rates, %