BoG halts 2-year monetary easing

Bank of Ghana

lending rates stop falling

The decision by the Monetary Policy Committee (MPC) of the Bank of Ghana to keep the Monetary Policy Rate (MPR) at 17 percent for the third consecutive time, despite significant falls in both inflation and interbank interest rates, marks a fundamental shift in monetary policy by the central bank.

Monetary easing, begun in the last quarter of 2016, has been stopped with the distinct possibility of monetary tightening looming on the horizon.

This means, the halting, at least for now, of deliberate efforts by the BoG to reduce domestic interest rates on savings and investments, a move which ultimately is already beginning to reflect in rising lending rates.

The fundamental change in monetary policy aims at defending the cedi’s exchange rate by trying to make cedi denominated investments and other financial assets more competitive against United States dollar denominated assets as the latter are being strengthened by ongoing hikes in        America’s benchmark Federal Funds Rate by that country’s central bank, the Federal Reserve Bank.

BoG Governor, Dr Ernest Addison confirmed this on Monday at the customary press conference which followed the 85th meeting of the MPC. He admitted that the MPC, in its latest deliberations, last week, recognized the “disconnect” between monetary easing in Ghana, in an effort to reboot stuttering economic growth, and monetary tightening in the US, which is returning interest rates to normal after nearly a decade of keeping them abnormally low with a view to instigating economic activity after the global financial crisis at the turn of the last decade had set off a global economic recession.

Ghana’s problem is that foreign investors are heavily invested in Ghana’s domestic, cedi denominated capital market – where they are allowed to invest in government treasury notes and bonds of two years tenor or more and indeed dominate subscription of those sovereign issuances – but have been increasingly moving out of cedi denominated treasury bonds whose coupon rates are falling, and moving into dollar denominated instruments whose coupon rates are rising.

This has been the primary reason why the cedi has cumulatively depreciated by 7.8 percent against the dollar since the beginning of the year, compared with 4.6 percent over the corresponding period of last year, as foreign investors have sold their cedi denominated bonds and purchased dollars to reinvest in western hemisphere financial markets.

The government of Ghana and its central bank have tried to stem the tide by letting interest rates rise on both the money market and secondary bond market. In October 2018, the 91 day treasury bill rate stood at 13.6 percent up from 13.3 percent a year ago, while the 182 day treasury bill rate has risen to 14.4 percent from 13.8 percent a year ago. Similarly the secondary bond market yields on seven, 10 and 15 year bonds have all edged up to 19.3, 19.3 and 19.5 percent in October 2018 from 17.5, 17.4 and 17.9 percent respectively in October 2017.

Instructively this is despite a fall in consumer price inflation to 9.5 percent for October 2018, its lowest level in about seven years, a decline in the weighted average interbank lending rate from 20.9 percent to 16.2 percent over the 12 months up to October this year and a fall in the average lending rates of banks to 26.9 percent by October this year, down from 29.1 percent a year earlier.

But now, with the BoG’s monetary easing now suspended, commercial bank lending rates are beginning to rise again. The Ghana Reference Rate, used as a benchmark for commercial banks in setting their respective base lending rates has been rising by the month since hitting a trough of 16.10 percent in August, and stood at 16.14 percent by October.

This is in response to the rising cost of funds for the banks; depositors usually demand a premium over treasury securities rates when placing fixed deposits with the banks and these are rising.

Corporate Ghana members will not like rising interest rates since their operations are largely credit driven but the alternative is even less palatable – renewed cedi depreciation.

By Toma Imirhe