According to BoG, the decision to increase policy rate is due to upside inflation outlook, the effects of the pandemic and the Russia-Ukraine war among others.
Addressing a press conference in Accra on Monday May 23, 2022 Governor of the Bank of Ghana, Dr Ernest Addison said despite the improvement in the trade balance due to favourable commodity prices, the external sector has weakened somewhat due to developments in the capital and financial account.
According to him, the domestic economy does not fully benefit from higher oil and gold prices due to retention agreements in these sectors.
He said “The increased repatriation from dividend payments and profits, as well as the net portfolio reversals, have resulted in a widened balance of payments outturn and loss of reserves. The prevailing tight global financing conditions, and further
policy rate hikes in Advanced Economies continue to pose risks to the external outlook.
“Headline inflation surged in April 2022. And, both headline and core inflation have stretched further above the upper limit of medium-term target band. The heightened uncertainty surrounding the inflation dynamics has weighed heavily on the domestic environment and significantly depressed business and consumer sentiments.
“The inflation numbers show that while food inflation has accounted for the increases in inflation over the past year, the recent jump in April shows that relative price increases in the non-food sector is accelerating at a fast pace, which provides information on the extent to which prices are becoming embedded. The Bank’s latest forecast shows a continued elevated inflation profile in the near term, with a prolonged horizon for inflation to return to the target band.
“Inflation expectations by consumers, businesses and the banking sector have also heightened. The risks to the inflation outlook are on the upside, and emanate from availability of inputs for food production, imported inflation, continued upward adjustments in ex-pump petroleum prices and transportation costs, possible increases in utility tariffs, and potential wage pressures. The second-round effects of these administered price adjustments would further amplify inflation pressures in the outlook.
“These considerations show that with the strong rebound in growth and the closing of the negative output gap, the balance of risk is clearly on inflation. The MPC took the view that it needed to decisively address the current inflationary pressures to re-anchor expectations and help foster macroeconomic stability. On the basis of the above assessment, the Committee decided to raise the policy rate by 200 basis points to 19 percent.”