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The Monetary Policy Committee of the central bank is hoping that by raising its policy rate by 100 basis points to 25 percent -- a 12-year high -- it will be able to tame inflation, which continues to drift from its target band.

Inflation dipped slightly from 17.9 percent in July to 17.3 percent in August, but the MPC ruled that the figure is still too high if the central bank is to achieve its target of single-digit inflation by end of 2016.

Speaking at a press briefing after the 66th regular MPC meeting, Dr. Kofi Wampah, BoG Governor said: "|Current forecasts suggest that attainment of the medium-term inflation target by end of 2016 will require further tightening in the monetary policy stance, or else the target horizon will shift into 2017".

At 25 percent, the policy rate is the highest since October, 2003 when the policy rate stood at 24 percent.

Since beginning of the year, inflation pressures have persisted due to volatilities in the foreign exchange market -- with implications for petroleum pricing and other tradable goods and services.

The hike in the policy rate comes after the International Monetary Fund (IMF) called for tightening of monetary policy to help bring inflation down against the background of exchange rate volatility.

The Bretton Woods institution in its September country report said the "Bank of Ghana should stand ready to tighten monetary policy further if inflationary pressures do not recede as expected".

With utility providers planning significant increases in tariffs, the central bank is worried that pass-through effects of the increases could push inflation further from its target.

The rate increase is part of MPC's approach to preventing first-round effects of the likely increases in prices, as well as the higher cedi liquidity during the first quarter, from being entrenched into elevated inflation expectations.

The MPC at its July meeting had hoped a sharp appreciation of the local currency against its foreign trading partners could act as a catalyst in bringing down inflationary expectations, but the currency has since then witnessed extreme volatility.

The uncertainty in the foreign exchange market heightens inflation, Dr. Wampah told newsmen in Accra.

The Governor however expressed hope that the currency volatility will moderate due to the tight monetary policy stance and anticipated inflows from the Eurobond issue and syndicated cocoa loan.

According to the MPC, government's fiscal consolidation continued in the first seven months of the year as revenues exceeded target while expenditure remained within target.

"These developments resulted in a fiscal deficit of 3 percent of GDP, within the programme target of 4 percent. Maintaining the pace of fiscal consolidation over the medium-term is necessary to complement the tight monetary stance for attainment of the medium-term inflation target," Dr. Wampah added.

Source: B&FT online

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