Emphasizing on the effects of the high monetary policy rate and inflation on banks and the economy at large, Professor Lord Mensah, a lecturer at University of Ghana, has advised the government to look for other alternative ways in curbing inflation and maintaining the policy rate.

The Bank of Ghana after its 110th Monetary Policy Committee for the year 2023, announced an increment of the Monetary Policy Rate on 100 basis points to 28 percent.

Sharing his opinion on the new policy rate and the recent hike in inflation rate, Prof. Mensah communicated that the government should look at its fiscal discipline, pertaining to how the government spends but rather target its the expenditure in a way of producing food.

“You can also spend in ways of getting food to the market which ultimately results in getting cheaper prices of food in the economy. If you look at the inflation aggregation you can see that it is food that is leading together with transport. So with all these put together it tells you that if we spend in a prudent way it will have a way of controlling our inflation.
“It is a system that is being managed, you shouldn’t look at it from one side. Day in and day out I keep on drumming that economic theories have moved away from inflation being managed by just increasing monetary policy and all that.”
Prof. Lord Mensah

Prof. Mensah averred that with the way the economy is being managed by government, interest rate will not come down anytime soon, hence, having a massive negative impact on the banking sector and the economy at large.

“The consequences will be that inflation will always be on the high side and it will deny the private sector the kind of funds they need to grow the economy. Because the private sector will be competing with the government and instead of the Central Bank to channel the funds through the banks to get to the private sector they will prefer directing it straight to the government.”
Prof Lord Mensah

BoG Urged To Implement Measures To Reduce Threats To Banks Solvency

The Banking Consult, Dr. Richmond Atuahene, has also advised the Central Bank of Ghana to put it in place authentic strategic measures that will help eliminate the various increased pressures on the liquidity of banks and the threat to their solvency.

Commenting on the new policy rate and the effect of inflation spike on the banking sector, Dr. Atuahene warned that the situation if not managed properly will affect the ability of banks to lend to private sectors and small businesses, hence, causing a depletion of regulatory capital.

An increase in the monetary policy rate tends to increase the rate charged on credit facilities granted to individuals by banks. Same applies to the inflation rates that have a negative influence on clients borrowing.

“From where I sit and the calculations in front of me, Bank of Ghana would need to work hard because out of the 23 (banks), I do not know which one would stay if we go by the International best practices.”
Dr. Richmond Atuahene

His advice follows the Bank of Ghana’s 110^thMPC reading and the stress test which revealed that some 23 banks would be heavily affected in terms of liquidity and capital after the debt exchange programme is rolled out.

The Governor of the Central Bank of Ghana, Dr. Ernest Addison, has however said measures have been outlined to deal with the liquidity issues of these banks.

“Yes, the bank did the stress test on the ability of these 23 or so banks to withstand the impact of the debt exchange.
“We did see the numbers, the implications for liquidity and the implications for capital and on the basis of that exercise, the bank came up with a high regulatory release which we thought would help them deal with the impact on liquidity and capital. We agree to reduce the cash reserve ratio from 14% to 12% on domestic reserves.”
Dr. Ernest Addison