On March 21, 2022, the Bank of Ghana (BoG) raised the Monetary Policy Rate by 250 basis points to 17 per cent. Dr. Ernest Addison, the Governor of the Central Bank, stated that this was a step to control inflation as he also attributed it to the upsurge in prices of goods and services and petroleum products.
He indicated that headline inflation had risen sharply to 15.7 per cent in February 2022, and both headline and core inflation were significantly above the upper limit of the medium-term target band. This has led to uncertainty surrounding price developments and also had a dire impact on economic activity, resulting in low business and consumer confidence. Dr. Addison revealed that the Bank’s latest forecast still depicted an elevated inflation profile in the near term, with inflation falling within the medium-term target band within a year.
Recently, after the Monetary Policy Committee (MPC) meeting, Dr. Ernest Addison announced on May 23, 2022, the review of the policy rate by 200 basis points from 17 per cent to 19 per cent. The increment has become an issue of concern for all, especially for the Association of Ghana Industries (AGI) as its members have been gravely affected by the increment which has thereby increased the cost of loans.
According to its Chief Executive, Seth Twum Akwaboah, the policy rate increase has pushed lending rates much higher and increased most manufacturing firms’ production costs per unit. Mr. Seth Twum Akwaboah lamented that if the hike in the policy rate is prolonged, there is the tendency it might take a lot of business out of operations which will largely affect the economy.
Monetary Policy Rate
The monetary policy rate, which is of great relevance to businesses, indicates the rate at which the Central Bank will lend to commercial banks. It also subsequently impacts average lending rates on loans to individuals and businesses. The rate is a signalling rate that is designed to be used as a benchmark for all other interest rates in the economy.
Implications For Local Businesses
A rise or a dip in interest rates has a significant impact on how business owners and customers interact with each other. Interest rate hikes can impact profit, savings, and whether or not a business will have access to financing. Higher interest rates lower asset prices, this reduces the value of the assets that firms that are constrained financially borrow against which means these firms are even less able to access credit.
Customers with debts also will have less income to spend because they are paying more interest to lenders. This results in a fall in sales. Also, firms with overdrafts will have higher costs because they must now pay more interest. A business owner who sells luxury items might suffer a slight dip in their sales since customers have less to spend on luxury products.
An increase in policy rates also makes it difficult to obtain business loans. It makes short-term loans more expensive. Higher interest rates don’t only affect long-term loans but also have an almost immediate effect on short-term loans. It makes it more difficult for small businesses to meet their daily financial obligations if emergency expenses arise. The recent increment in the policy rate has left many Ghanaian businesses struggling to survive, with some on the verge of folding up.
This is not good for our economy and the government must sit up and rescue the many businesses who have been hardly hit by the increment in policy rates if we are to prevent another case of “collapsed banks” as seen during the “financial sector cleanup”.