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Ghana's central bank left its policy rate steady, saying the rise in inflation to above its target was driven by food prices and while short-term risks to inflation from fiscal expansion and rising crude oil prices are emerging, it still expects inflation to return to the target in the second quarter.

The Bank of Ghana (BOG) kept its policy rate at 14.50 percent, unchanged since March 2020 when it was cut by 150 basis points in response to the threat to economic activity from COVID-19.

After rebounding in the third quarter of last year when gross domestic product only fell 1.1 percent after a 3.7 percent annual contraction in the second quarter, the current economic recovery could be hampered in the near term by the renewed threat from a second wave of the pandemic, BOG said.

Ghana's inflation rate rose to 10.4 percent in December, above the target range of 8.0 percent, plus/minus 2 percentage points, from 9.8 percent in November.

While accommodative monetary policies in advanced economies have triggered a search for yield in emerging and developing economies, rising debt vulnerabilities in emerging and frontier economies - including Ghana - pose significant risks and could potentially worsen investor risk appetite, the bank said.

"These conditions will require managing fiscal risks in the outlook for the Ghanaian economy," it said. adding the prospects of a sharp fiscal correction in 2021 looks unlikely amid the second wave of the pandemic, which will require additional spending to provide testing and vaccines.

To put debt on a sustainable path, BOG said some new revenue measures and expenditure rationalization efforts will have to be pursued to allow for the generation of primary surpluses.