Upward pressure on interest rates

……ahead of key end-March Monetary Policy Rate decision

Ahead of the next meeting of the Bank of Ghana’s Monetary Policy Committee (MPC), scheduled to begin on March 26, upward pressure on domestic interest rates is already being exerted in the country’s money market.

This is the result of demands for higher yields, not just by foreign investors at the medium to long term end of the spectrum, but also by local investors at the short end of the spectrum as well. It is therefore increasingly unlikely that the BoG will cut its benchmark Monetary Policy Rate any further at the end of this month after a 100 basis points cut announced at the end of January.

The performance of the yields on the government’s treasury has been varied, ahead of the announcement of the February 2019 consumer inflation today, and which will form a key input for the MPC’s decision making at the end of this month.

The yield on the 91-day bill remained unchanged at 14.71 percent last week whilst that of the 182-day bill edged upwards by 2bps to 15.15 percent last week against the 15.13 percent recorded during the previous week. That of the 2-year note also remained unchanged at 19.75 percent when the week began.

With the current downwards momentum of the cedi against other major international currencies, economists project an increase in the consumer price inflation rate at the imminent next announcement.

With all these factors in play, all things being equal, investors are likely to ask for higher yields to cushion returns against higher inflation in the coming weeks.

Even at the current interest rates, an analysis by Doobia has shown that government is struggling to raise the monies needed from the money market to finance the domestic component of the higher fiscal deficit target of 4.2 percent for 2019, up from 3.7 percent in 2018.

The government raised a total of GHc 993.32 million last week, which was well below the target of GHc 1.26 billion for the week.

Analysts project that government may continue to struggle to raise the funds required in the coming weeks if yields fail to rise in line with investor expectations of higher inflation.

Even as the BoG seeks to cope with this situation, econometric modelling by its Research Department has generated a forecast that would make rising domestic interest rates inevitable. According to the department’s Phillip Abradu-Otoo and Bernard Jagre Wolley, the expected slowdown in economic growth in both of the worlds two biggest economies – the United States and China – which between then account for 34 percent of the global economy, will dampen Ghana’s real GDP growth, induce cedi exchange rate depreciation and push both inflation and interest rates upwards.

While the latter is expected to happen from the third quarter, the MPC, which relies heavily on the data and analyses generated by the BoG’s research department is unlikely to lower interest rates further in the face of an impending need to raise them again, especially when current rates are proving insufficient to attract the quantum of investor funds required by government to refinance its maturing debt obligations and finance its fiscal deficit spending.

Expectations of rising interest rates emanate from both projections of rising inflation (which in turn would result from further cedi depreciation) and tightening of financial conditions in the western hemisphere, including demands for wider spreads from investors on bonds issued by emerging market economies such as Ghana. This would have implications for both the cedi denominated debt securities issued on Ghana’s domestic money and capital markets, and for dollar denominated sovereign bond issues such as the US$3 billion bond issuance planned for this year by the government of Ghana which BoG research analysts predict could cost some 100 to 120 basis points higher than hitherto expected.

By Toma Imirhe & Joshua Amlanu