Let’s make credit more accessible, affordable
The Bank of Ghana (BoG) has increased its key benchmark interest rate, the Monetary Policy Rate (MPR), from 17 to 19 per cent due to concerns over rising inflation and unfavourable global economic conditions.
The policy rate is the rate at which the BoG lends to commercial banks in the country and serves as the benchmark interest rate for onward lending to businesses.
The Governor of the BoG, Dr Ernest Addison, announced the policy rate at the Monetary Policy Committee (MPC) meeting in Accra yesterday.
The increase in the rate, may stem inflation and control the spiraling prices of goods and services.
Since the Ghana Statistical Service announced the March inflation rate of 19.7 per cent, prompting the central bank to increase its policy rate from 14.5 to 17 per cent, inflation had crossed the 23.6 per cent mark in April, making it even more difficult for the government to convince investors to subscribe to the country’s cedi-denominated domestic debt securities.
Foreign investors themselves may not be attracted by the higher coupon rates generated by the increase in the MPR, unless it is inordinately large, since the cedi’s fragility is a major concern.
Even when the government has offered a higher coupon rate, investors are reluctant to subscribe to short-to-medium-term debt instruments.
Indeed, by mid-May, the coupon rate offered for 91-day treasury bills had risen to 18.23 per cent; 182-day treasury bills were offering 19.26 per cent, while 364-day treasury notes were offering 21.13 per cent. These rates are roughly five per cent more than what they were a year ago.
This means the BoG would have to set the MPR at a level that pushes treasury bill rates above inflation.
The problem here is that with the current spread of a little over 120 basis points for 91-day treasury bill rates over the MPR, the BoG’s benchmark interest rate would have to rise to at least 22 per cent for this to happen.
While interest rates in general and investment securities pricing are being driven by the government’s own debt refinancing and fiscal deficit financing needs, the MPR is just as impactful on the cost of private sector debt and economic growth rate.
The increase in interest rates will, in turn, push the average lending rate, currently at 21.02 per cent, to over 23 per cent.
Worse still, higher interest rates will automatically make loans riskier in the perception of the lender and so banks would tend to increase the risk premium they put on the base rate they all use.
Much as we welcome the policy rate increase by the central bank, we are also worried about the rising cost of funds and the lack of accessibility to loans for the private sector, which is touted as the engine of growth.
We are also concerned about the way an increase in the lending rate could impact on the outlook for growth and employment and whether we are not making the cost of living extremely high by further squeezing the already tight cedi liquidity levels.
But the admission by the Governor of the BoG that we have to bite the bullet is an indication that the authorities are fully aware of the problems and the measures instituted to make credit accessible and affordable to the private sector.
As the cost of credit rises, we urge the authorities to find ways of cushioning the private sector, so that this latest hike in interest rates does not stifle growth.