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Business News of Wednesday, 20 May 2015

Source: B&FT

WAMI economist endorses BoG policy rate hike

The senior economist of the West African Monetary Institute (WAMI), Dr. Christian Ahortor, has endorsed the Bank of Ghana’s (BoG) decision to increase the Monetary Policy Rate by 100 basis points to 22 percent as it will put the economy in good stead.

The BoG in its second MPC meeting for the year decided to increase the monetary policy rate from 21 percent for the first time in six months, citing control of inflation and depreciation of the cedi as the major reasons behind the decision.

However, amid the various public backlashes the central bank has received, the senior economist in an interview with the B&FT said it was a step in the right direction.

“One has to look at the factors that the MPC considered before revising upward the benchmark for interest rates. Usually, BoG is more concerned about inflation. So any factor that is likely to push inflation is their primary concern.

So during the MPC meetings what they usually look at is, what are the upsides or downsides to their overall targets? Where do they want inflation to be at the end of the year? So as they meet periodically, they look at some of these underlying factors to see whether the fundamentals are pointing to some kind of downward pressure,” he said.

He noted that apart from the inflationary factors the central bank considered, other pressing factors such as the economic situation in other countries are also considered by the Bank of Ghana before such a decision is made.

“Other underlying factors that they may look at include the fiscal pressure. They also look at what is happening in the external environment. They look at the reserve position of the country to determine if we have enough funds to cushion the currency. They also look at what is happening in other economies.

“For example, if there is a tendency for interest rates to go up in the US, investors will be moving resources away to the US. So if you keep your interest rates at the same level then you are not encouraging investors in your country, because they have to make profit to cover the inflation and depreciation, then you are going to allow investors to move resources to other places,” he said.

Mr. Ahortor further stated that the current debilitating economic conditions in the country, which are spearheaded by the energy crisis, continue to become more unfavourable and leave the MPC with little or no option other than increasing the policy rate to ensure macroeconomic stability.

“If you look at our country currently, you can see that the fiscal pressure is there. Government is still borrowing. Externally we are not getting enough from our export receipts, so our reserves are still low. The rainy season has not started yet for food prices to go down. So to make sure that they are able to control inflation and depreciation of the cedi, the Bank of Ghana saw it right to increase the MPR.

“So to me it is not a bad thing…because we have had some macroeconomic challenges. So in an environment where the cedi continues to depreciate and inflation continues increasing, topped with the power crisis, business confidence will be low. And once business confidence is low, it slows down growth. So you need to restore macroeconomic stability in order to increase growth in the medium- to long-term,” he added.

The senior economist however admitted the concerns by the business community that the increment will make it difficult for investors to access loans from banks are legitimate, but said the decision when successful will contribute to growth in the long-term as it will restore macroeconomic stability.

Asked why the interest rate has risen over the years, Mr. Ahortor attributed it to the persistent borrowing from banks, the cost of doing business, the inflation rate and depreciation of the cedi.

The high interest rates have become a topical issue in the country, as many stakeholders express their disappointment and dissatisfaction with this national predicament.

Recently the Minister of Trade and Industry, Ekwow Spio-Garbrah, launched a campaign against the high interest rates which have made the cost of doing business increasingly expensive in the country.