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.