By Toma Imirhe
Last week the Bank of Ghana announced a 100 basis points hike in its benchmark Monetary Policy Rate following the majority decision made by its newly reconstituted Monetary Policy Committee, led by new central bank Governor Dr Johnson Asiama, which had met for three days earlier in the week. This takes the MPR up to 28%, from the 27%, at which it had been held since September last year, itself the result of a sharp 200 basis points cut from the erstwhile 29%.
The MPR is the rate at which the BoG would lend short term to commercial banks to smooth over any temporary liquidity challenges they might face. Although, banks have preferred to lend to each other on the interbank market rather than resort to the central bank since the banking sector melt down at the turn of the decade, the MPR still serves as their guide as to where the BoG wants interest rates to go.
Therefore last week’s hike in the MPR is expected to result in a roughly commensurate increase in rates charged by most of Ghana’s commercial banks. The interbank weighted average interest rate, at which most banks can obtain short term liquidity, roughly mirrors the MPR, averaging 27.06% in January and 27.04% in February.
The Ghana Reference Rate, which serves effectively as the base lending rate for all commercial banks – being computed by them in collaboration with the BoG – has been a little higher at 29.72% in January and 29.96% in February. Actual average lending rates have of course been higher still – although only slightly so – at 30.07% in January and 30.12% in February.
The increase in the MPR aims at slightly tightening monetary policy to squeeze out the excess liquidity which was created largely by government’s fiscal deficit overrun in 2024, caused by expenditure exceeding target in the run up to the December general elections. The fiscal deficit, on commitment basis was 7.9%, twice the 3.8% target, and the BoG sees the resultant liquidity injection as a key reason why the downward trend in consumer inflation from a peak of 54.1% in December 2022, has stalled at about 23% for several months now.
But the imminently increased interest rate regime for the commercial banking industry may cause difficulties for government itself. Stringent fiscal discipline and resultant fiscal consolidation by the President Mahama administration since it assumed office in early January has enabled it to reject relatively high offers for its treasury bill issuances, thereby forcing down yields on short term treasuries. Indeed, on the same day that the BoG announced the increase in the MPR to 28%, last week’s treasury auctions results were showing that the 91 day treasury bill rate had fallen to 15.74%, barely half of the 28.37% offered in January. Similarly the 182 day treasury bill rate has fallen to 16.93% down from January’s 28.98% and the 364 day treasury note rate has fallen to 18.85%, down from 30.26% in January.
But with headline consumer price inflation still at 23.1%, this means treasury instruments are offering negative interest rates which is generating declining attraction for financial institutions and other savvy investors. Last week, after weeks of oversubscription, the effects of now negative interest rates on treasury bills showed up, as government failed to attract its targeted subscription of GHc5,644 million, as only GHc4,708.82 million was tendered.
However government stuck to its game plan, accepting only GHc4,113.20 million and rejecting the highest bids which went as high as 16% for 91 day bills and 17.3% for 182 day bills.
BoG Governor Dr Asiama has explained that although monetary and fiscal policy should work in tandem, right now government’s primary objective is to minimize its debt servicing costs which means minimizing its treasury instrument yields, while the central bank is focused on squeezing out inflationary pressures by tightening monetary policy.
There are indeed factors favouring government’s success in issuing treasury bills with negative interest rates over the coming weeks. One is that the banks are offering a mere 10.5% on retail sized fixed deposits and virtually nothing on current accounts which account for most of their deposits; and investors have little choice, with the longer term domestic bond market still closed and the non-bank deposit takers who offer higher rates on fixed deposits lacking the confidence of most depositors.
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EDITORIAL
Monetary tightening confirms the plan to restore economic stability first
Last week, the Bank of Ghana laid any lingering doubts over whether expansionary supply side economics or demand management driven economics was going to guide the President John Dramani Mahama administration during the early stages of its tenure in office. By increasing the benchmark Monetary Policy Rate by 100 basis points to 28%, it is now clear that the restoration of macro-economic stability is the immediate target, with the promised expansionary policy stance to follow after this has been achieved.
The interest rate hike follows on from the new government’s unusual – but prudent – decision to cut public expenditure this year in a bid to bring the fiscal deficit down to 4.1% of Gross Domestic Product, from the well above target 7.9% outcome in 2024. But the rate hike has surprised many who thought that the central bank would follow the lead of government itself which has used financial discipline to achieve rapid fiscal consolidation which in turn has forced treasury bill rates down to the lowest levels since 2022.
The MPR increase last week will expectedly bring about slight increases in interest rates charged by financial intermediation companies to borrowers, although it should be noted that the sharp drop in treasury bill rates since the new government assumed office had not been accompanied by a similar drop in rates charged by commercial lenders, since inflation has stubbornly stuck at just over 23%. Rather the drop in treasury bills has simply been the result of government’s successful strategy of cutting back on its short term treasury issuances and its rejection of the relatively high bids that have been made for them, in order to cut its interest costs.
The underlying problem behind still high commercial rates then remains relatively high inflation and this is what the BoG, as an inflation targeting central bank, has set its sights on.
To be sure its monetary policy stance is on solid ground. Monetary tightening tends to curb inflation but at the cost of the economic growth rate. But Ghana’s growth rate is sturdier than expected, at 5.7% in 2024, exceeding both the target of 4.0% and 2023’s performance of 3.6%. Furthermore there are early signs that it will remain strong this year. The BoG’s real sector indicators point to a sustained improvement in economic activity, amid significantly improved business and consumer sentiments.
Besides, government has conservatively targeted a 4% growth rate for 2025 in anticipation of the economic costs of fiscal consolidation and a tightened monetary stance to bring inflation down drastically, in order to set the foundation for sustainable expansionary economic policy.
The first stage of the Mahama administration’s game plan is to restore economic stability, epitomized by low inflation and fiscal deficit, and exchange rate stability. The Bank of Ghana has obviously read the script.
