BoG trades off interest rate hike to save cedi

The Bank of Ghana is trading off interest rates hikes to save the cedi, which has dropped by about 18 per cent this year, underlining the economic difficulties the country faces.
The Institute of Economic Affairs (IEA), the Association of Ghana Industries (AGI), Ghana National Chamber of Commerce and Industry (GNCCI) and the Ghana Employers Association have on separate occasions raised concerns about the rising interest rates in the country.
The cedi has lost 18 per cent this year and is already trading at GH¢ 4.00 to the dollar after a surprise 100 basis points increase in the main borrowing rate to 22 per cent.
Currently, banks’ interest rates average between 30 and 33 per cent, while that of microfinance companies range between 70 and 75 per cent per annum. This is against savings and deposits nterest rates of just four and eight per cent.
Bank of Ghana governor Dr Henry Kofi Wampah said that the rise in interest rates was intended to stabilise the cedi and rein in expectations for inflation, which hit 16.8 per cent last month on the back of a lower exchange rate.
Moral persuasion
“I agree that there have been a lot of complaints about how much the banks charge, especially in the light of the profits they are making and so on.”
“Some of these things we do through moral persuasion. The major factor in this regulatory environment where we have deregulated interest rates is that if we have sustained macroeconomic stability, that can have significant effect on interest rate or lending rates,” Dr Wampah said.
But the unexpected interest rate rise by the central bank to stem inflation has failed to stop the debt-stricken country’s cedi plunging to a low.
“The higher interest rate should also serve to make the country less vulnerable to the adverse implications of US interest rate rises,” he added.
“The exchange rate depreciation is one of the factors that the committee considered before moving up on the policy rate because we found out we need further tightening to rein in aggregate demand and, therefore, reduce the pressure on the foreign exchange market,” he said.
A weakening currency and a high budget deficit are among problems that have reversed the country’s growth trajectory.
Businesses are feeling the as inflation reached a five-year high of 16.8 per cent in April.
Credit: Graphic Online

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