April 13, 2012 / 12:52 PM / 6 years ago

UPDATE 3-Bank of Ghana seeks to bolster cedi with rate hike

* 1 pct point rate hike follows similar rise in Feb

* Bank fears cedi weakness is a risk to economy

* Inflation fears high in election year

* Analysts say move may not be enough to halt cedi slide (Adds deputy governor’s comments, details)

By Kwasi Kpodo

ACCRA, April 13 (Reuters) - The Bank of Ghana hiked its key interest rate by a full percentage point to 14.5 percent on Friday to support the cedi, warning that the weakness of the currency posed an inflationary threat and endangered the stability of the economy.

Ghana is the latest African nation to gain middle-income status after it began commercial oil output in 2010. Political stability and a growing middle class have made it an attractive target for foreign investors.

But an import-driven slide in the cedi, which has dropped more than 8 percent against the dollar this year, prompted a rate hike at the upper end of analysts’ expectations.

The central bank also issued one of its strongest warnings on the inflationary risks ahead.

“Recent developments in the exchange rate remain a major source of concern, and its possible impact on inflation as well as implication for the country’s international reserves calls for decisive policy measures to stem the trend,” Governor Kwesi Amissah-Arthur said.

“Although growth potentials remain strong, prevailing exchange rate developments could act to offset the gains made in macroeconomic stability,” he told a news conference after a meeting of the bank’s monetary policy committee.

The cedi was trading at 1.792 to the dollar late on Friday, after starting the day at 1.791. The currency remains within sight of its recent record low of 1.800.

The interest rate hike followed a similar 100 basis-point hike in February which was the first rise in three years.

Amissah-Arthur said the bank would reduce net open position requirements on banks, the difference between their assets and liabilities in a particular currency, in a bid “to improve the supply of foreign exchange by banks to the market”.

Data this week showed March annual inflation edged up to 8.8 percent from 8.6 percent the month before. But the cedi weakness has raised concerns of future inflationary pressures, especially if the government increases spending before an election due in December.

NOT ENOUGH?

Analysts said the rate hike highlighted growing concern over the currency, which has been driven down by factors including strong import demand for equipment by local companies.

“It demonstrates to us that the MPC expects the cedi depreciation pressures to translate into upward inflationary pressures,” said Yvonne Mhango, Sub-Saharan Africa analyst for Renaissance Capital, whose main-scenario forecast had been for the Bank to keep rates unchanged.

“The upside inflation risk has risen significantly for the MPC, which is in accordance with our view. We expect inflation to edge up towards the early teens by year-end 2012.”

Standard Bank’s Samir Gadio welcomed the move but questioned whether it would be sufficient.

“This is going to send the signal to the market that it is ready to tighten liquidity, which will slow the depreciation for now. But the bank doesn’t have the reserves to be able to sell sizeable amounts of dollars. The odds remain against the cedi being strong or even stable,” he said.

The central bank said the rate hike would provide “space” for issuing short and long-term government paper to investors at attractive rates, as part of efforts to mop up liquidity.

“We believe that with today’s rate adjustment, there is room for us to issue notes and lock out the excess liquidity in the system for a defined period and also be able to pay attractive interest to investors,” deputy governor Kofi Wampah said.

He told Reuters the central bank got additional income in cedis from its dollar sales by virtue of the depreciation and this would provide resources to back the issue of long-term notes. The bank is hoping to issue a 2-year note next month and Wampah said he expected that it would attract a high offshore interest due to the policy rate hike.

The statistics office this week revised upwards its estimate of Ghana’s 2011 growth rate to 14.4 percent from an earlier estimate of 13.6 percent. Ghana started commercial oil production from its offshore Jubilee field in late 2010.

Growth for this year is seen at just above 8 percent. (Writing and additional reporting by Mark John; Editing by Pascal Fletcher)

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