UPDATE 2-Bank of Ghana raises prime interest rate to 19.0 pct

Wed Jul 9, 2014 2:55pm EDT

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By Kwasi Kpodo

ACCRA, July 9 (Reuters) - The Bank of Ghana raised its prime interest rate by 100 basis points to 19.0 percent on Wednesday to contain inflationary pressure, and it urged tougher government action to stabilize the economy.

Years of rapid economic growth and political stability have improved Ghana's reputation, but the government is battling fiscal instability, including a high budget deficit, inflation and a currency that has depreciated 30 percent this year.

Annual consumer price inflation rose to a four-year high of 15.0 percent in June from 14.8 percent in May, the statistics service said.

Central Bank Governor Henry Kofi Wampah told a news conference the bank's Monetary Policy Committee viewed the risks to inflation as elevated.

"The persisting fiscal and exchange rate pressures have provided additional impetus for the worsening inflation outlook," he said.

That figure pushed inflation further beyond the 2014 target of 9.5 percent, plus or minus 2 percent, and it is not likely to return to its target range before the fourth quarter of 2015, Wampah said. He urged the government to take a firm policy stance.

"Fiscal consolidation will require a more aggressive stance in the second half of 2014. Government must continue to enhance revenue measures and rationalise expenditures to achieve the fiscal deficit target of 8.5 pct of GDP," he said.

The macro-economic problems have stirred a policy debate, and Moody's agency last month cut its sovereign rating for Ghana, citing the instability.

Several economists argue that the real responsibility for restoring stability lies with the government of President John Mahama rather than with the central bank.

Melissa Verreynne of NKC Independent Economists in South Africa said the rise in interest rates was a positive move as far as it went that would help restore credibility, rein in inflation and stem the slide in the cedi currency.

"It may be counter-productive to address the economy's woes by monetary measures, as the root cause is the fiscal position ... I am doubtful how much of an impact the policy rate increase will have in the absence of substantial fiscal adjustments, which do not seem to be forthcoming," she said.

For its part, the government says it will announce a series of fresh policies soon and has already taken tough measures, including cuts to fuel and utility subsidies in 2013, and that it will achieve its objective of reducing the deficit under a multi-year programme.

It also says the medium-term prospects for the economy are bright, particularly once fresh oil revenues come onstream as production rises. (Writing by Matthew Mpoke Bigg; Editing by Larry King)

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