Ghana's central bank left its policy rate steady, saying "some monetary restraint" is needed as the budget deficit and inflation has risen following the extraordinary fiscal and monetary stimulus measures that were taken to boost economic activity during the COVID-19 pandemic.
The Bank of Ghana (BOG) kept its rate at 14.50 percent after cutting it by 150 basis points in March along with the primary reserve requirement.
"The most recent data on the Ghanaian economy shows that the pandemic has impacted adversely, resulting in a significant growth downturn and higher inflation," BOG said.
Since November 2016 BOG has been slowly lowering its key interest rate from 26.0 percent as inflation has been decelerating after topping 19 percent in the first few months of 2016 and the falling to below 8 percent in the first months of this year.
But in recent months food prices have risen, pushing up inflation to 11.2 percent in June and 11.3 percent in May.
"The sharp rise in inflation in the second quarter has somehow disrupted the disinflation process with a potential of prolonging the time horizon for reaching steady state of inflation," BOG said, adding inflation expectations have trended upward.
But BOG said underlying inflationary pressure remain stable and it expects inflation to return to its medium-term target band by the second quarter of 2021 as long as corrective fiscal measures will be taken in the near term.
BOG targets inflation at a midpoint of 8.0 percent, with a range of plus/minus 2 percentage points.
Fiscal stimulus and lower government revenue in the first half of the year has boosted the budget deficit to an estimated 6.3 percent of gross domestic product, more than twice the target of 3.0 percent.
The mid-year budget review has raised the deficit target to 11.4 percent of GDP by the end of this year from an earlier target of 4.7 percent, reflecting an additional 6.7 percent of GDP attributable to both direct and indirect COVID-19 impact, as the estimate of revenue and grants have been revised downwards and expenditures and arrears clearance have been revised higher.
The primary fiscal balance is projected at 4.6 percent of GDP from an initial target of a surplus of 0.7 percent, with the fiscal deficit path leading to a rise in the stock of public debt to 67 percent of GDP at the end of June from 62.4 percent in December 2019.
Although the government's stimulus measures were the right direction to boost economic activity, BOG said the 2021 budget should focus on measures to return to the path of fiscal consolidation to help return to macroeconomic stability.
"The Committee was of the view that the current extraordinary circumstances, with a widened budget deficit and a residual financing gap, would require some monetary restrained to preserve the anchors of macroeconomic stability," BOG said.
Ghana's economy grew by an annual 4.9 percent in the first quarter of this year, down from 6.7 percent in the same period last year and 7.9 percent in the previous quarter as non-oil growth slowed to 4.9 percent from 6.0 percent.
In May BOG forecast economic growth this year of between 2.0 and 5.0 percent.
