Policy rate hikes harm access to credit - Business groups

BY: Maclean Kwofi
Dr Joseph Obeng - President, GUTA

JUST like consumers, businesses are experiencing their fair share of the escalation in prices of goods and services in recent times.

The high inflationary trend is eating away their profits, distabilising their budgets and dampening their growth.

For entities that are just emerging from the catastrophic effects of the persisting COVID-19 pandemic, this is a big blow as it deepens their woes and risks prolonging their recovery.

That is why efforts to insulate their operations from the price jumps must be prioritised.

While the Bank of Ghana (BoG) recognises this and has actually responded through its core tool – the policy rate – and other monetary policy tools, the fallouts have not been palatable to firms.


Last week, three business groupings made separate appeals to BoG to rethink the increases in its policy rate to help tame inflation.

The Ghana National Chamber of Commerce and Industry (GNCCI), the Ghana Association of Industries (AGI) and the Ghana Union of Traders Association (GUTA) told the central bank that the increases in the policy rate was rather raising the cost of credit and compounding their finance cost rather than reining in inflation.

While the GNCCI and the AGI last week engaged management of the central bank to share their concerns firsthand, GUTA told the paper that it was seeking an opportunity to make a similar appeal.

The Chief Executive Officer (CEO) of GNCCI, Mark Badu-Aboagye, and the President of GUTA, Joseph Obeng, said in separate interviews with the Graphic Business that the policy rate was of keen interest to businesses because it signalled the rate at which the central bank would lend to commercial banks.

GNCCI’s position

Between January and May this year, the policy rate has gone up by 450 basis points.

It was increased from 14.5 per cent in January to 17 per cent in March before being raised further to 19 per cent in May.

With inflation rising from 23.6 per cent in April to 27.6 per cent in May, it is obvious that BoG would respond with a further increase in the policy rate at its next Monetary Policy Committee (MPC) meeting in July.

Mr Badu-Aboagye of the GNCCI said such actions were injurious to businesses.

“We have asked the bank not to increase the policy rates again because it is hurting businesses,” he told the paper.

He said the effect of the increment was that interest rates and the cost of doing business would go up tremendously.

“And so, that was why we went to meet BoG to discuss the possible mitigation measures for businesses. If there can also be a discussion to prevail on commercial banks to not increase their rate as per the increment in policy rates,” he said.

“When the policy rate goes up, the Treasury bill rates also goes up and the likelihood that commercial banks will prefer to buy T-bills than give their money to businesses is very high and so, we may now pay more to access credit,” he added.

He cited the decline in credit to businesses in recent times as evidence of banks avoiding lending, noting that further increment would mean that most banks will now lend to the government instead of the private sector.

Supply constraint

He said although BoG’s reason for the increase in policy rate was to contain inflation, the GNCCI saw the rising inflation as rather supply constraint.

He said the chamber, therefore, proposed to the government to consider increasing supply and not necessarily increasing the policy rates.

“We have advised that we should look at how to ensure that we get the basic food because when you look at the consumer price index (CPI) basket, food inflation was the highest followed by transport and imported items.

“We also advised that we should take steps to change the structure of the economy from an import-dependent to export-led so that most of the things we are importing, which is causing high inflation can now be produced locally,” the CEO of the chamber said.

GUTA's argument

Dr Obeng of GUTA noted that the policy rate increased was in bad taste at this time for businesses.

“They increased the base rate about two months ago purposely to change inflationary trend because they presume that there is excess liquidity in the system.

“But we think BoG has not diagnosed the current inflation trend well,” he said.

He noted that it was clear that the current inflation trend was not due to excess liquidity but rather a cost driven.

“If purchasing power has gone down, how can you say excess money is chasing small goods and for this reason you will increase policy rates periodically.

“And so, increasing the base rate will only compound this problem because of cost constraints. We are in this problem because of cost and this is due to world commodity prices, freight rates, exchange rate, reversal of the benchmark policy, migration of VAT to standard rates and other local levies,” he said.

He added that due to the increase of the prices of goods, traders were not able to buy more nor were they able to secure their turnover and it was pushing most of them out of business.

“This is because consumers are not able to buy more due to the limitation in their purchasing power,” he said.