3% policy rate hike to tackle cedi depreciation, portfolio reversals – Economist
Economist with GCB Capital, Courage Boti, has said the 300 basis points increment in the monetary policy rate by the Central Bank is mainly to tackle the depreciating cedi and halt portfolio reversals by investors rather than tackle the country’s inflation.
Making the assertion in an interview on CNBC Africa and monitored by norvanreports prior to the conclusion of the emergency MPC meeting by the Central Bank, Mr Boti quipped the emergency meeting was necessitated by the alarming depreciation rate of the cedi and portfolio reversals by investors.
“I think at the moment, the emergency meeting is less of inflation concern and more of the cedi which has fallen over 15% in two weeks, which is quite alarming.
“And looking at the data, the country’s reserves are quite depleted now, $7.6bn at the last print and the liquid reserve even less, and the general sentiment on the market at the moment suggests that if nothing is done immediately, the currency might sink low.
“And its implication for our heavy exposure to external debt, that I believe are the reasons this emergency meeting,” he remarked.
“I am expecting some 100 to 150 basis points hike in the policy rate and probably in addition to some other policy interventions or measures to hold the cedi.
“If for nothing at all, to even attract new investment so as to halt the reversal of portfolios which we are seeing on the market at the moment,” he furthered.
Policy rate rises to 22% on 300 basis points hike by BoG
The Central Bank has hiked its policy rate by 300 basis points.
The hike in the prime rate follows the emergency Monetary Policy Committee (MPC) meeting held by the Central Bank on Wednesday, August 17, 2022.
On the back of the policy rate hike, the new policy rate of the Central Bank stands at 22%.
With the increment in the policy rate, interest rates on bank loans to households and businesses is expected to increase, making cost of production by businesses more costly.
The increment in the policy rate by the Central Bank is believed to mainly due to the country’s rising inflation and heightened pressures in the foreign exchange market regarding the depreciation of the cedi.
“Under the circumstances, and considering the risks to the inflation outlook, the Committee decided on a 300 basis points increase in the Monetary Policy Rate to 22 percent,” said the MPC.
BoG raises reserve requirement to 15%
Meanwhile, the Central Bank has announced an increment in the primary reserve requirement of banks in the country.
Per the statement issued by the MPC following its emergency meeting, primary reserve requirement of banks has been increased from 12% to 15%.
This marks a sharp increase of 3 percentage points in the reserve requirement of banks.
According to the Central Bank, increment in the reserve requirement of banks will be done in a phased manner with the first increment to take effect on September 1, 2022.
The second and third phases of increment will take place on October 1, 2022 and November 1, 2022 respectively.
Primary reserve requirement refers to the portion of total deposits that banks are required or mandated to keep at the Central Bank.
They serve as a defense against a substantial reduction in liquidity and kept against major unexpected withdrawals.
Aside the increment in the reserve requirement, the Central Bank also revealed plans to begin purchasing foreign exchange particularly dollars, from mining firms and international oil and gas companies in the country.
According to the apex bank, this is to boost the supply of foreign exchange to the economy and effectively strengthen its foreign exchange auctions, particularly to Bulk Oil Distribution Companies (BDCs).
This move by the Central Bank, is expected to stabilise the fast depreciating cedi which has recorded a year-to-date depreciation rate of 25%.
“To boost the supply of foreign exchange to the economy, the Bank of Ghana is working collaboratively with the mining firms, international oil companies, and their bankers to purchase all foreign exchange arising from the voluntary repatriation of export proceeds from mining, and oil and gas companies. This will strengthen the central bank’s foreign exchange auctions,” said the BoG.
Increment in the primary reserve requirement and the purchase of foreign exchange from mining firms and oil and gas companies, the BoG noted, forms additional measures to the increment in its monetary policy rate.
