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Interest rate hikes and inflation deepen crisis for advanced and less developed economies alike

The increasingly worsening economic and financial situation confronting so-called emerging market and developing economies has been highlighted by the decision last week by Ghana’s central bank to carry out the biggest interest rate hike in 20 years.

Bank of Ghana in Accra (Image: Bank of Ghana)

In an emergency meeting, the central bank lifted its base interest rate by 300 basis points (3 percentage points) to 22 percent, citing “strong underlying inflationary pressures.” The central bank’s base rate has risen by 850 basis points from November of last year when it was 13.5 percent, a level which had been maintained since 2015.

Inflation in Ghana rose in July for the 11th consecutive month and is now running at an annual rate of 31.7 percent, its highest level in almost 20 years. Food inflation is at 32.3 percent, with the largest drivers of price hikes being transport, housing and fuel costs.

Ghana’s currency, the cedi, has lost 25 percent of its value over the past year, and is the world’s second worst performing currency after the Sri Lankan rupee. Like Sri Lanka, the government of President Nana-Akafu Addo and his ruling New Patriotic party is holding discussions with the International Monetary Fund on a $3 billion loan after earlier resisting such a move.

As in Sri Lanka, any bailout will be accompanied by major attacks on the social conditions, wages and jobs of the working class. As the negotiations begin, the central bank’s decision, which will do nothing to bring down inflation, is seen as a “reassurance” by the government and financial authorities that they will carry out the IMF’s dictates.

The world’s three major credit rating agencies have already downgraded Ghana’s government bonds to junk status.

The worsening situation in Ghana is being replicated across the continent and around the world. The Nigerian inflation rate has hit a high of almost 20 percent—the highest in 17 years—as food, transport and energy costs rise rapidly.

In South Africa, the continent’s largest economy, the value of the currency, the rand, fell by 5 percent last week and the yield on 30-year government bonds has climbed to more than 10 percent, as financial and economic conditions worsen. The South African central bank raised its interest rate by 75 basis points last month, a move that was followed in neighbouring Namibia in the biggest hike for 20 years.

The US Federal Reserve has made clear that, if necessary, it will induce recession, following in the footsteps of Fed chief Paul Volcker in the 1980s who lifted rates to record highs.

The “Volcker shock” produced economic devastation in the US and internationally, particularly in Latin America which experienced a “lost decade” in the 1980s.

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