Private sector credit contracts by 7.5% in October, reflecting banks’ caution amid macroeconomic challenges
The Bank of Ghana (BoG) in its 115th Monetary Policy Committee (MPC) press release on Monday, reported a contraction in credit to the private sector for the month of October 2023. The contraction according to the BoG is attributed to banks redirecting their resources toward short-term investments rather than the extension of credit.
This strategic shift comes in response to heightened risks associated with lending, stemming from the deteriorating macroeconomic conditions and the impact of the Domestic Debt Exchange Programme (DDEP).
Private sector credit recorded a notable contraction of 7.5% in October 2023, a stark contrast to the robust 57.3% growth witnessed in the same month of the previous year. In real terms, the contraction was even more pronounced, reaching 31.6%, compared to a growth of 3.0% in the corresponding period.
Simultaneously, the interbank weighted average rate, representing the rate at which banks lend among themselves, experienced an upward trajectory to align with the policy corridor (policy rate). The weighted average rate increased from 23.98% in October 2022 to 28.49% in October 2023. This adjustment is also in line with movements in the monetary policy rate and an increase in the Cash Reserve Ratio.
The tightening of interbank rates had a direct impact on policy transmission, resulting in an improvement as the average lending rate of banks increased to 32.69% in October 2023, compared to 31.40% recorded in the corresponding period of 2022. This shift indicates a concerted effort to align lending practices with the broader monetary policy framework.
The MPC’s findings underscore the cautious approach adopted by banks in the face of economic uncertainties, emphasizing risk management and the prioritization of short-term investments over credit expansion. The dynamics between interbank rates, policy corridor adjustments, and lending rates further reflect the intricate balance being sought within the monetary policy landscape.
