Economists react to new policy rate
The Bank of Ghana has tightened its key lending policy from 19 per cent to 21 per cent in a bid to realign the money markets rates and further strengthen the cedi.
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This is the highest single increase in a Monetary Policy Committee (MPC) sitting since March 2010 which by implication will increase interest rates and crowd out the private sector.
The Governor of the BoG and Chairman of the MPC, Dr Henry Kofi Wampah, said fiscal pressures, including weak revenue performance, rising debt service costs, a large public sector wage bill and outstanding payments owed to statutory funds posed a risk to fiscal consolidation in the medium term.
Reactions by economists
But economists are surprised at the move of the Bank of Ghana to hike its key lending rate. Economic Consultant, Mr Kwamina Essilfie Adjaye criticised the model used by the Bank of Ghana in determining its rates.
“Increasing the rates with the expectation that it will bring inflation down is an easy and convenient for them to operate and they do not want to change,” he said in an interview.
He said the policy rate is a major factor in determining the market rates and that increasing the rate by as much as 200 basis points at this time of the year is likely to affect industry, particularly the manufacturing sector which is already being hard hit by irregular power supply.
“So this increase will afffect their cost of borrowing and thereby limit their expansion,” he said.
Chartered Economist and lecturer at the University of Cape Coast, Dr John Gatsi agrees that the increase in the policy rate would also influence banks to increase their new base rates, which would likely push up interest rates.
This, he said, is likely to push the interest rates up to a certain level, which can raise the Non Performing Loan(NPL) portfolio of the banks.
“When the default rate goes up, it affects the profitability of the banks,” he said in an interview.
Dr Gatsi is , however, upbeat that the increase in the policy rate would attract investors to the country’s debt instruments due to the expected high yields.
Governor defends increase
But the Governor, Dr Wampah defended the increase saying that the hike in the policy rate to 21 per cent is expected to reduce the band around it and have a neutral impact on borrowing costs.
“The rate at which the central bank lends to commercial banks remains unchanged at 24 per cent,” he said.
“The committee decided to maintain the current tight policy stance and at the same time realign rates in the money market within the interest-rate corridor,” Dr Wampah added.
“The repo rate, which is the rate at which the central bank borrows from commercial lenders, was set at 18 per cent. The cash reserve requirement was cut by one percentage point to 10 per cent and a further reduction may be considered when appropriate,” Dr Wampah stated.
In another measure of its fiscal problems, the total public debt stood at 57.3 per cent of gross domestic product in August, up from 55.5 per cent last December. The budget deficit was 5.9 per cent of GDP in October against a 6.4 per cent target.
Inflation and T-Bill rates
Meanwhile, Ghana’s annual consumer price index rose to a fresh four-year high of 16.9 per cent in October from 16.5 per cent the previous month, according to the Ghana Statistical Service.
The worry is that the government’s risk-free debt instruments have also increased from 19.2 to 25.5 per cent for the 91-Day Treasury bill, while the 182-Day instrument also increased from 18 to 26.4 per cent.
The economy has grown rapidly in recent years due to its export of oil, cocoa and gold, but the government is struggling to stabilise the economy in the face of a high budget deficit and a currency that has fallen sharply this year.
“The ease in inflation over the policy horizon is contingent on significant fiscal consolidation and maintenance of the tight monetary policy stance. Without that the inflation target could take a longer duration in excess of 12 quarters to be achieved,” said Dr Wampah. GB