Cost of credit expected to rise

By Elorm Desewu The cost of credit to the private sector and public institutions from commercial banks in the country is to be expensive in the wake of Monetary Policy Committee, (MPC) decision to hike the policy rate by 100 basis points to settle at 14.5 percent from 13.5 percent. This also means the government is unlikely to achieve its end of year Gross Domestic Product, (GDP) growth of 5 percent. The policy rate is the at which banks borrow from the central bank as their last resort and also serves as benchmark for setting the Ghana Reference Rate for the banks in the country. Headline inflation has risen consistently from the low of 7.5 percent in May 2021 to 11.0 percent in October driven by both food and non-food price increases. In addition, all the Bank’s core measures of inflation have increased, indicating broad-based underlying inflation pressures, with the potential of de-anchoring inflation expectations. Currently, headline inflation is above the upper limit of the medium-term target band and the Bank of Ghana, (BoG), noted significant risks to the inflation outlook. These risks include rising global inflation, high energy prices, uncertainties surrounding food prices and investor behaviour. BoG further noted that these elevated inflationary risks, require prompt policy action to re-anchor inflation expectations to safeguard the central bank’s price stability objective. Recent price developments show elevated pressures on headline inflation in the second half of 2021. The two readings since the last MPC meeting pointed to a sharp increase in headline inflation from 9.7 percent in August 2021 to 10.6 percent in September and further up to 11.0 percent in October. This indicates that currently inflation is out of the medium-term target band of 8±2 percent by 1 percent. The rise in inflation for October 2021 was largely driven by non-food prices, which increased from 9.9 percent in September to 11.0 percent in October 2021, while food inflation dipped from 11.5 percent in September to 11.0 percent in October 2021. Similar to the trends in headline inflation, underlying inflation pressures are also increasing. All the Bank’s core measures of inflation increased over the period. The main core inflation measure, which excludes energy and utility, increased from 9.5 percent in August 2021 to 10.0 percent in September and further up to 10.4 percent in October 2021. In addition, the weighted inflation expectations index, which captures inflation sentiments of consumers, businesses and the financial sector, also picked up significantly in October 2021. On the money market, interest rates generally trended downwards over the review period. The 91-day and 182-day Treasury bill rates declined to 12.5 percent and 13.2 percent respectively in October 2021, from 14.05 percent and 14.11 percent, respectively in October 2020. Similarly, the rate on the 364-day instrument decreased to 16.2 percent from 17.0 percent over the period. Except for rates on the 3-year, 15- year and 20-year bonds which remained unchanged at 19.0 percent, 19.8 percent and 20.2 percent respectively, rates on the other medium to long-term instruments generally declined during the period. On the secondary market, however, rates have started increasing across the spectrum of the yield curve. On the interbank market, the weighted average rate declined to 12.7 percent from 13.6 percent, largely reflecting improved liquidity conditions, which transmitted to lending rates. Average lending rates of banks declined to 20.3 percent in October 2021 from 21.3 percent in October 2020, consistent with developments in the interbank market.