Policy rate cut questioned over the depreciation of cedi
Adnan Adams Mohammed
Economist has challenged the Bank of Ghana, (BoG), for the recent
cut of its policy rate for universal banks by 100 basis point to 16 percent
from 17 percent.
There are certain threats to the economy such as the effects of a
depreciating cedi and the Central Bank should have taken note of this before
taking a decision to cut the policy rate from 17% to 16%, Kwesi Boti, an Economic
Analyst with Databank Group has said.
The development is likely to influence the cost of credit in the
country. This means that, there commercial banks in the country will have to
consider lowering their interest rates on loans to local businesses.
“This new MPR cut will expectedly result in lower coupon rates for
short term debt securities – and subsequently short term bank loans – since the
policy rate itself is designed to transmit policy at the short end of the money
market. Foreigners are not allowed to invest in government securities of less than
two years tenor and so this will not affect them,” financial journalist, Toma
Imirhe has suggested.
This is to possibly reversing the ongoing increase in short term
interest rates as such government’s benchmark 91 day and 182 day Treasury bill
rates. However, the central bank expects the cut not to affect medium to long
term yields on government’s benchmark treasury bonds which have been rising on
the secondary market at even faster pace than their short term counterparts.
Bank of Ghana, for the first time in nine month, reduced its
policy rate for universal banks by 100 basis points to 16 percent from 17
percent.
“The move was influenced by
a fairly stable outlook for the economy. We are also convinced about measures
government is taking to stabilize the economy and check its rising expenditure,
Central Bank Governor, Dr Ernest Addison said.
But, the new monetary policy strategy is predicated on the need to
lower the borrowing rates charged businesses in Ghana to make them more cost
competitive, while at the same time allowing the interest yields earned by
investors in government’s medium to long term cedi denominated debt securities,
which are predominantly invested in by foreign investors, to be sufficiently
competitive against dollar denominated investment instruments issued in the
western hemisphere, and whose offered yields have been rising over the past
year in accordance with rate hikes led by the United States Federal Reserve
Bank. Those rate hikes have persuaded investors to move substantial investment
volumes out of Ghana and into dollar denominated investments, putting pressure
on both the cedi exchange rate and Ghana’s balance of payments position.
Over the past year, these rates have nevertheless been rising as
part of a general increase in offered yields on government securities to curb
portfolio dis-investment by foreign investors. During 2018, 91 day and 182 day
Treasury bill rates rose by 1.3 percent and 1.2 percent respectively to reach
14.6 percent and 15.0 percent.
However, the medium and long tenure instruments yields on the
secondary market have risen considerably faster in an effort to attract and
retain the foreign investors. The Seven year bond yields rose by 4.7 percent
from 16.3 percent to 21.0 percent; 10 year bond yields climbed by 4.5 percent
from 16.7 percent to 21.2 percent; and 15 year bond yields increased by 4.2
percent from 17.2 percent to 21.4 percent.
The reduction in the MPR will not affect the direction of yields
on those medium and long term bonds
The BoG’s strategy, while increasing yields for foreign investors
in medium to long term bonds, has at the same time enabled a 3.2 percent fall
in the weighted average interbank lending rate from 19.3 percent to 16.1
percent, while average lending rates of banks have declined by 2.4 percent from
29.3 percent to 26.9 percent.
“Local borrowers using corporate bonds for their financing – such
as non-bank lenders who have been issuing bonds on the Ghana Alternative Market
to finance their lending – will now incur higher financing costs as corporate
bond yields rise in consonance with those on government bonds, even as their
counterpart enterprises who borrow short term enjoy cheaper loans”, Toma Imirhe
has said.
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