Ghana’s runaway inflation pushed its central bank to a record interest rate spike

Bank of Ghana increased interest rates by 300 basis points, its highest increase in two decades.
Prices went up between June and July 2022 by 3% in Ghana
Prices went up between June and July 2022 by 3% in Ghana
Photo: Reuters/Francis Kokoroko (Reuters)
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Overwhelmed by high costs of food, transportation, and other necessities, Ghana is hoping that a new increase in the cost of borrowing will quell a streak of 11 straight months of rising inflation.

After an emergency meeting on Aug. 17, the Bank of Ghana raised interest rates from its July level of 19% to 22%. Ghana’s interest rate has exceeded that mark before—it was at 26% for 11 months until November 2016. But the 3% increase this time is the highest jump the Bank has made between monetary policy meetings since 2002, per the Financial Times.

Ghana’s interest rates rise as inflation worsens

The backdrop for the spike is a July inflation rate of 31.7%, the country’s highest since 2003. Ghana wants its inflation at around 8% but recent realities, especially in the months after the pandemic, have made that an illusion.

Rising food prices have contributed to Ghana’s inflation this year, with food inflation increasing to 32.3% in July. There’s a similar situation in Nigeria where a sixth straight month of rising inflation was confirmed this week, driven by 22% food inflation. But where the Central Bank of Nigeria has only raised rates in small leaps this year (it’s rate is currently at 14%), its west African neighbor has been more aggressive.

Indeed there may be a greater need for Ghana to be desperate. Its currency, the cedi, is the second worst performing in the world this year after Sri Lanka’s rupee. The cedi has fallen for 15 straight weeks, weakening by 36% since the beginning of the year, according to Bloomberg.

Ghana needs more money in the bank

To compound all this, Ghana isn’t making enough money to give
its economy a stronger fighting chance.

“The execution of the budget for the year has remained challenging,” the Bank of Ghana said in a statement (pdf) after its latest rates increase. “Revenue has not kept pace with projections and created financing challenges. In the absence of access to the international capital market and given the constrained domestic financing, central bank overdraft has helped to close the financing gap as reflected in the mid-year budget review.”

As part of its anti-inflation measures, Ghana’s central bank has increased the reserve requirement of banks from 13 to 15% to be implemented in phases from now till November. Also, the bank hopes to convince mining and oil companies to sell foreign exchange to it and, consequently, boost its forex auctions.