Ghana’s Monetary Policy Rate Hike and Your Investment

The primary objective of the Bank of Ghana is to pursue sound monetary policies aimed at price stability and creating an enabling environment for sustainable economic growth. Price stability in this context is defined as a medium-term inflation target of 8±2%, for which the economy is expected to grow at its full potential without excessive inflation pressures.

To achieve the objective of price stability, Bank of Ghana had granted operational independence to employ whichever policy tools were deemed appropriate to stabilise inflation around the medium-term target. The Bank of Ghana’s framework for conducting monetary policy is Inflation Targeting (IT), in which the central bank uses the Monetary Policy Rate (MPR) as the primary policy tool to set the monetary policy stance and anchor inflation expectations in the economy. 

On July 24, 2023, the Monetary Policy Committee (MPC) of the Central Bank announced a 0.5% hike in the Monetary Policy Rate (MPR) to 30.0%. This implied that Ghana’s borrowing rates have now gone up by 16.5 percentage points in less than two (2) years, hitting the highest rate in more than ten (10) years.

The drive to fight Ghana’s inflation by raising interest rates has been going on for over a year and half, resulting in diverse effects on the economy, consumers and investors

Effects on the economy

Ghana’s Real GDP growth slowed to 3.3% in 2022, down from 5.4% in 2021 due to the combined effect of macroeconomic instability, global financial tightening, and the lingering impact of the Russia-Ukraine war. The outlook is skewed to the negative due to possible shocks from a prolongment of the war and a tighter global financial market. The World Bank projects the country’s growth to slow further to 1.6 % in 2023 and remain muted in 2024, before returning toward its potential.

The higher MPR set by the MPC is consequently increasing the cost of borrowing for businesses. With higher borrowing costs, businesses might postpone or reduce their investment plans. Projects that were previously economically viable at lower interest rates might become less attractive, leading to a slowdown in capital expenditure. Startups and small businesses, which often rely on external financing, might find it particularly challenging to secure affordable loans. Thus, it may become a challenge for such businesses to invest in new projects and / or expand their operations. This can contribute to and even further slow down economic growth and hinder job creation.

According to the 2022 Report of the Centre for Affordable Housing Finance in Africa, the average loan amount offered by lenders in Ghana, ranges from GH¢80,000 (US$9,930) to GH¢1,600,000 (US$198,650) for cedi mortgages and US$15,000 (GH¢120,815) to US$35,000 (GH¢281,900) for dollar mortgages. In relation to a mean national household income of GH¢2,828 (US$350) per month and a monthly household expenditure of GH¢1,071 (US$133), the affordability of mortgage and housing in general, remains far-fetched.

Mortgage rates are closely tied to the prevailing interest rates in the economy. As central banks raise the policy rate, commercial banks adjust their lending rates, causing mortgage rates to rise as well. Higher mortgage rates mean that borrowers will have to pay more in interest over the life of their loans. This can lead to increased monthly mortgage payments, making homeownership more expensive. Thus, a potential reduction on the demand for such mortgages. On the flip side, there could be slower home sales and potentially downward pressure on housing prices. Homeowners with adjustable-rate mortgages or existing mortgages with higher rates might find it less appealing to refinance when rates are higher.

The local currency can also be sensitive to policy rate changes. A higher interest rate in a country can attract foreign investors seeking better returns on their investments. As a result, there might be increased demand for the local currency to invest in financial assets, leading to currency appreciation. All things being equal, a higher rate can encourage foreign capital inflows, as investors seek to take advantage of the higher yields available. This influx of foreign funds can drive up demand for the local currency, leading to its appreciation. The increase can makes financial assets, such as government bonds and other fixed-income instruments, more attractive to investors. This yield advantage can lead to increased demand for the local currency.

Bonds

Bond prices and policy rates have an inverse relationship. When rates rise, newly issued bonds offer higher yields, making existing bonds with lower yields less attractive. This leads to a decrease in bond prices. As bond prices decrease, the total return from holding existing bonds could be lower. This can impact fixed-income portfolios, especially for investors holding long-term bonds.

 

Equities

There can be short-term fluctuations in stock prices with changes in rates as investors consider the likely effects on the profits or revenues of listed companies. A rate hike can lead to higher borrowing costs for consumers, affecting their spending patterns. If consumers cut back on spending due to higher interest rates, companies might experience reduced revenues. High interest rates also result in high financing cost which together with the reduced revenue will lead to lower profits, potentially impacting stock prices.

Real Estate

Real estate developers and homebuyers may face higher borrowing costs due to increased interest rates. This can lead to decreased demand for real estate, affecting property values and potentially impacting real estate investment trusts (REITs) that rely on borrowing.

Fixed Deposits

As interest rates rise due to a rate hike, the interest rates offered on new fixed deposits tend to increase, leading to higher returns for depositors. With higher interest rates on fixed deposits, they can become more attractive compared to other lower-yielding savings vehicles. Savers seeking a secure and predictable return might be more inclined to invest in fixed deposits.

Overall, the monetary policy rate serves as a tool that allows the central bank to influence borrowing costs and, consequently, economic activity and inflation. By adjusting this rate in response to changes in economic conditions, the central bank aims to keep inflation within a target range and ensure stable prices over the medium to long term.

The effectiveness of the monetary policy rate depends on various factors, including the overall economic conditions, the level of interest rates in the economy, fiscal policies, and external economic influences. Central banks use a mix of monetary policy tools and carefully assess economic indicators to determine appropriate adjustments to the policy interest rate in pursuit of their policy objectives.

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The information contained in this blog is being provided for educational purposes only and does not constitute a recommendation from any Bora Capital Advisors entity to the recipient. Bora Capital Advisors is not providing any financial, economic, legal, investment, accounting, or tax advice through this blog to its recipient.

This report reflects the views and opinions of Bora Capital Advisors Ltd, and is provided for information purposes only. Although the information provided in the market review and outlook section is, to the best of our knowledge and belief correct, Bora Capital Advisors Ltd, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed in this report, except as required by law. The portfolio performance data represented in this report represents past performance and does not guarantee future performance or results.

When The Central Bank Posts Losses

According to The Official Monetary and Financial Institutions Forum (OMFIF), an organization that tracks central banking and economic policy, central banks globally recorded losses in a bid to manage their reserves in 2022 amid bond-heavy allocations that took a major hit as a result of aggressive monetary policy tightening around the world and other country-specific factors. According to the OMFIF report, currency interventions in 2022 by monetary authorities to prop up their financial units against a resurgent dollar also contributed to portfolio losses on central bank reserves. The U.S. bond market, the largest in the world for example, had the worst-ever year on record in 2022, undertaking multiple 75 basis-point hikes over the last year to curb stubbornly-high inflation, before decelerating its pace.

Some Central Banks that have recorded losses globally include;

  • The Reserve Bank of Australia (RBA) recording a 2022 book loss of 37 billion Australian dollars, which more than wiped out the central bank’s equity.
  • The UK Government facing £150 billion bill to cover Bank of England’s losses (According to the Financial Times of July 25, 2023).
  • The Swiss National Bank (SNB) in early January reported a record preliminary loss of 132 billion francs for 2022.
  • In September 2022, the central bank of the Netherlands notified the country’s government in a letter that it projects net interest losses amounting to a potential EUR 9 billion for the years 2023 through 2026.
  • Ghana’s central bank, unfortunately was not left put of the hit. In its 2022 Annual Report and Financial Statements, The Bank of Ghana (BoG) recorded a loss of GH¢60.8billion having posted a GH¢1.2 billion profit in 2021.

Is it typical for a Central Bank to record looses?

Central banks can report losses especially during seasons of economic downturns. This can be as a result of various factors.

Central banks often hold various assets on their balance sheets, such as government bonds, foreign exchange reserves, and other financial instruments. During economic downturns, the value of these assets can decrease due to market fluctuations, reduced demand, or credit risks. As a result, the central bank may experience losses on the value of its assets.

Central banks may implement certain policies in a bid to stimulate borrowing and spending. Such a policy may be to lower interest rates. When interest rates are lowered, the central bank’s income from its assets, such as government bonds, also decreases. This reduction in income can contribute to losses.

In the face of currency volatility during an economic distress, central banks that hold foreign currency reserves as part of their monetary policy strategy can make losses if the currency depreciates in value relative to its domestic currency.

When a central bank records losses, it can have various implications for banks and the broader economy. The effects depend on the specific circumstances, reasons for the losses, and the actions taken by the central bank in response.

The Case of Ghana’s Central Bank

According to BoG’s 2022 Annual Report and Financial Statements, the loss of GH¢60.8billion is attributed to a decline in the Group’s net worth position due to the impact of the Domestic Debt Exchange Programme (DDEP) and impairment of some assets, which accounted for approximately 88.5% of the loss amount. 

BOG steps to recover from loss

It’s important to note that central banks usually aim to manage their operations and respond to challenges in ways that minimize negative impacts on the broader economy and individuals.

In its Annual Report, the Central Bank, outlined these measures as their approach to recovery. These include:

  • Retention of profits to help rebuild capital until equity firmly returns to positive region;
  • Refrain from monetary financing of the Government of Ghana’s budget. In this respect, action has already been taken with a Memorandum of Understanding on zero financing of the budget signed between the Bank of Ghana and the Ministry of Finance on 26 April, 2023;
  • Take immediate steps to optimise the BoG’s investment portfolio and operating cost mix to bolster efficiency and profits; and
  • Assess the potential need for recapitalisation support by the government in the medium-to-long term

Ghana’s Central Bank, currently having a negative shareholders’ equity need recapitalisation as a prudential requirement, i.e., improve their balance sheet in order to return to a positive equity position.

What to expect

The effects of central bank losses can be complex and interconnected with broader economic dynamics. The specific implications is dependent on the effectiveness of the central bank’s actions, the economic context, and to some extent, government policies.

If a central bank records losses and local banks are struggling to meet minimum capital requirements, the situation can pose significant challenges for the financial system and the broader economy. The combination of central bank losses and weak banks can create a complex and potentially destabilizing scenario.

Local Banks, who have taken losses and struggling to meet minimum capital or solvency requirements may tend to reduce their lending activities in an attempt to conserve capital. This can lead to a credit contraction, making it difficult for businesses and individuals to obtain loans for investment, consumption, and other essential activities. Reduced lending can ultimately slow down economic growth.

There is the potential for increased market volatility. Asset prices, including stocks, bonds, and other financial instruments, could experience sharp declines due to uncertainty and lack of confidence. The GSE Financial Sector Index is already reflecting this as the index keeps declining on a year-to-date basis.

There is the potential for increased market volatility. Asset prices, including stocks, bonds, and other financial instruments, could experience sharp declines due to uncertainty and lack of confidence. The GSE Financial Sector Index is already reflecting this as the index keeps declining on a year-to-date basis.

It is expected that there will be a close coordination between regulatory authorities, the central bank, and the government. Effective coordination is necessary to restore confidence, stabilize the financial system, and implement appropriate policy measures.

To address these challenges, governments, central banks, and regulatory authorities would need to implement a combination of monetary, fiscal, and regulatory measures. These might include capital injections, liquidity support, recapitalization of banks, policy adjustments, and efforts to restore market confidence. The aim would be to stabilize the financial system, restore trust, and prevent further deterioration of economic conditions.

Considering the huge negative equity position, until the Central Bank of Ghana has moved into positive equity regions, one questions whether the BoG has the moral right to revoke the license of any Bank that lacks sufficient capital.

Given the current high inflation rate in the country and year end target of 38.1%, it is important that the Central Bank refrain from further deficit financing on the Government in order to strengthen its money market operations and also demonstrate that even with a negative equity position, it can sustain the economy adequately.

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The information contained in this blog is being provided for educational purposes only and does not constitute a recommendation from any Bora Capital Advisors entity to the recipient. Bora Capital Advisors is not providing any financial, economic, legal, investment, accounting, or tax advice through this blog to its recipient.

This report reflects the views and opinions of Bora Capital Advisors Ltd, and is provided for information purposes only. Although the information provided in the market review and outlook section is, to the best of our knowledge and belief correct, Bora Capital Advisors Ltd, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed in this report, except as required by law. The portfolio performance data represented in this report represents past performance and does not guarantee future performance or results.