The Central Bank of Ghana yesterday raised its prime rate by 1.5 percentage points from 17% to 8.5% on the heels of a soaring inflation.

The announcement comes in the wake of concerns raised by some Economists who were of the view that it was prudent to maintain the prime rate at 17% to help solve the issue of inflation which now stands at a five year high of 19.86 percent.

They argued that the prime rate feeds into general lending rates and have the effect of decreasing credit volumes to businesses and individuals alike, hence increasing it further would slow down economic activity and raise inflationary figures, adding that a flexible monetary policy is needed to complement the expansionary fiscal policy proposed in the 2008 budget.

The Bank's prime rate had been at a three-year high of 17 percent since last July, when soaring oil and food prices spurred retail price inflation to 18.4 percent in June.

Dr. Paul Acquah, Governor of Bank of Ghana said the bank's composite index of economic activity showed a steady growth in economic activity into the fourth quarter of 2008 with a year on year growth of 21.1 percent .adding that latest survey points to signs of softening consumer confidence at the close of the last year, and carried over into the year.

He said all the real sector indicators during the year point to a relatively higher pace of economic activity than has been recorded in the past few years, basing his argument on recent preliminary estimate of 21.1 percent growth by the Ghana Statistical Service.

Dr. Acquah said available data 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.

Credit to the private sector and public institutions by deposit money banks over the year 2008, increased by GH¢1,820.3 million compared with GH¢1,626.7 million for 2007.

According to him, the banking sector recorded strong asset growth and improved profitability during the year, adding that the financial soundness indicators, measured in terms of earnings, liquidity and capital adequacy remained strong with the median values at high levels.

Underpinning this growth in assets was strong growth in deposits which reached GH¢6,949.0 million at the end of December 2008 (an annual growth of 41.4 percent, following an annual growth of 45.3 percent for 2007).

Dr. Acquah said provisional fiscal data for 2008 indicated that the fiscal policy during the year has been expansionary. Revenue outcomes have been robust, in line with the strong momentum in economic activity during the year, and were mostly above budget targets. Total revenue and grants for 2008 was GH¢5,619.7 million against a budget estimate of GH¢5,616.6million. This compares with GH¢5,611.1 million (40.2 percent of GDP) for 2007.

On the other hand, total expenditure for 2008 was up at GH¢8,009 million (32.7 of GDP) compared with a budget estimate of GH¢6466.1 million, and GH¢ million (40.2 percent of GDP) for 2007. He said these developments resulted in a budget deficit (excluding divestiture) of GH¢2,558.5 million (14.9 percent of GDP) in 2008.

On the outlook for the year, Dr. Acquah said a Monetary Policy tightening is necessary to break the incipient dynamics of price inflation and exchange rate expectation as well as withdraw some stimulus from the economy and to reinforce the anchor for inflation expectation and stability.

He projected inflation to peak early in the second quarter before returning to the range of 10-13 percent by the end of the year on the path to a single digit in the fourth quarter of 2010.