Many central banks around the globe have been deploying high interest rates as a key strategy to combat inflationary pressures.
When central banks raise interest rates, they are essentially making borrowing more expensive. This action starts with a clear signal of intent, followed by a series of incremental increases in the benchmark interest rate.
This benchmark rate serves as a reference point for other borrowing costs throughout the economy.
The underlying logic is simple yet powerful: higher interest rates reduce the amount of money circulating in the economy.
This reduction in available money can lead to lower consumer spending and decreased business investment, effectively cooling down the demand that has been driving inflation.
Moreover, higher interest rates incentivize saving over spending, further contributing to a slowdown in economic activity.
Nevertheless, the use of high interest rates comes with potential downsides. While effective in combating inflation, these measures can also dampen economic growth and increase the cost of servicing debts, impacting both businesses and households.
Striking the right balance is crucial, as central banks must navigate between tackling inflation and maintaining broader economic stability.
Togbe Afede XIV, the Agbogbomefia of the Asogli State, has raised concerns about the Bank of Ghana’s (BoG) interest rates, warning that they could negatively affect the cedi.
He believes that keeping interest rates “unnecessarily high” will continue to harm the cedi’s value.
“The truth is, all these variables are related. Whilst the policy rate is an important tool of monetary policy, its misuse, as in our case, can have damaging effects. As long as interest rates are kept unnecessarily high, our currency, the cedi, will continue to suffer adverse consequences, with pass-through effects on other prices, including transport fares, utility tariffs, and fuel prices.
“Persistent cedi depreciation has been a key factor in our energy (including power) sector problems. We have always felt the need to adjust prices, not because consumers were not paying enough, but because the cedi has been depreciating.”
Togbe Afede XIV
The BoG, on the other hand, pointed to recent forecasts indicating a possible rise in inflation. Factors contributing to this possible rise include increases in transport fares, utility tariffs, higher fuel costs, and the effects of currency depreciation on prices.
BOG’s Rate Policy Challenges Economic Stability
Togbe Afede XIV expressed doubt about the recent monetary policy rate set by the Bank of Ghana (BoG), which aims to balance economic stability. He stated that achieving economic stability and sustainable high growth will be difficult as long as interest rates remain excessively high.
“BOG concluded that their monetary policy rate decision underscores their commitment to balancing economic stability amid persistent ‘inflationary risks’ and supporting the sustainable growth of the economy. But economic stability and sustainable high growth will remain elusive as long as interest rates stay astronomically high.”
Togbe Afede XIV
He highlighted the challenging position of the Bank of Ghana (BoG), which currently has a negative net worth of GH₵55 billion. He emphasized that this situation would likely make the BoG cautious about rapidly lowering interest rates.
“With a GH₵55 billion negative net worth, BOG is indeed in a quagmire and would be reluctant to see interest rates fall quickly at this critical time when it needs to make more money to survive. And its new tiered Cash Reserve Ratio (CRR) system should bring it more free cash for its exploitative and predatory lending activities. This is in addition to its power to print money.”
Togbe Afede XIV
Central banks globally use high interest rates to curb inflation, but the strategy risks slowing economic growth. Togbe Afede XIV’s concerns highlight challenges in Ghana’s economic stability amidst interest rate debates.
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