Accra, May 19, GNA - The Monetary Policy Committee (MPC) has increased the Bank of Ghana prime rate from 14.25 per cent to 16 per cent, citing the threat posed to the economy by increasing oil prices and high inflation.

Announcing this at a press conference on Monday after a quarterly review of the economy, Dr. Paul Acquah, Chairman of the MPC, said the decision to raise the rate was taken with the view to strengthening the anchor for macro-stability.

Businesses have expressed fears that a raise in the prime rate would translate into high cost of borrowing from banks and add to their cost of production.

But Dr Acquah said the increase in the rate was necessary to ensure a stable macro-economic environment, which was essential for the long-term growth of the economy.

He said while the general assessment of economic prospects remained strongly positive, the uncertainty about inflation had weighed down business and consumer confidence.

"Inflation has risen sharply over the past three months. Both headline and core inflation are now significantly above the target set over the medium term," Dr Acquah said. Inflation went up from a low of 10.2 per cent in September last year to 15.3 per cent in April 2008, driven by rising crude oil and food prices.

Despite the uncertainty, Dr Acquah said the economy continued to show good and robust performance and both business and consumer expectations about the economic prospects for the rest of the year remained generally positive.

He was optimistic that the Gross Domestic Product (GDP) rate of 6.3 per cent set in the budget would be attained by the end of the year. Credit to the private and public institutions continued its strong growth increasing by GH¢1,615.8 million compared with GH¢846 million recorded for the same period in 2007. The private sector accounted for 81 per cent of the increase in credit.

Dr Acquah said evidence from the Bank's survey of credit conditions indicated increased access to credit by both enterprises and households and the easing of credit conditions was broad based with small and medium enterprises gaining improved access to credit.

According to him the strong growth in liquidity of the banking system had been supported by significant increases in deposit mobilization with the opening of more bank branches and introduction of new products to attract deposits.

Total deposits increased by 42 per cent year-on-year to GH¢4,828.9 million at the end of the first quarter of 2008 compared with 40 per cent for the same period in 2007. Dr Acquah said preliminary banking data of the fiscal position for the first quarter of 2008 showed buoyant revenue growth matched by sharp expenditure growth.

Total revenue and grants for the first four months of 2008 amounted to GH¢1,505.28 million (9.2 percent of GDP), compared with GH¢1,436.71 million (10.3 percent of GDP) for 2007. On the other hand, total expenditure (excluding foreign financed capital) was up at GH¢1,964.19 million (12.1 percent of GDP) including an estimated GH¢200.8 million (outlays on the energy infrastructure financed by sovereign bond proceeds), compared with GH¢1,536.4 million (11 percent of GDP) recorded for 2007 and a budget target of GH¢5,109.3 million for the year.

This brings the narrow budget deficit (defined to exclude foreign financed capital expenditure) but including expenditure financed by capital market borrowing for the first quarter of 2008 was GH¢479.54 million (2.9 percent of GDP), compared with GH¢125.97 million (0.9 percent of GDP) for the same period in 2007. The deficit in addition to a foreign loan repayment of GH¢207.86 million, were financed from the domestic economy. Total public debt stock stood at US$7,607.0 million (46.7 percent of GDP) at the end of the first quarter of 2008 compared with US$7,146.5 million (51.1 percent of GDP) at the end of 2007.