What does this mean for the financial environment? A lot! Like a double edged sword the interest rate is going to cut sharper. The reason given by the BOG was to mop up excess Cedis to curb current and expected inflation running up to the end of the year. This may work in an environment where data systems are accurate and economic data can be trusted with very minimal margin of errors. If excess Cedis are mopped up, spending is reduced and erroneously inflation is curbed. On the other hand if you have some Cedis to invest in government bonds, you rake some good returns. Great for pension funds and other long term investments, but a woe to businesses. If one has some Cedis to invest in a safe instrument, this is the time to look at the treasury bill, possibly the 182-day. But for a business, it is a much crunchy time.
1. Spending is reduced therefore people are buying less from the business.This business may already be reeling under high operation costs due to the energy crises and probably the Cedi’s instability to the Dollar.
2. Then comes the cost of borrowing. If there is already a loan running on variable rate, the company’s liabilities shoots up by doing just nothing at all.
Now based on these two factors alone customers are going to pay more for goods by businesses passing on some aspect of the increased business cost to customer. The business may also buy higher from the supplier. In essence this is inflation! Would the increased base ratenecessarily have curbed inflation? May be in the inflation figure yes, but in the ordinary man’s pocket, not at all. This is even the case where banks are prepared to give credit. Ordinarily in such conditions, banks cut credit and this indication has already been made by some banks. Why would banks continue to give credit when more loans are turning into non- performing loans (NPLs).According BOG figures, NPLs increased from 11.2% in June to 13.1 in July, and this is quiet high in just one month. Secondly why would financial institutions (FI) give loans when they can invest risk-free for such great returns from the treasury bill cutting down all cost associated with managing credit risk? Indeed in the same BOG figures, banks have cut lending from Ghs29.8 billion in June to Ghs27.4 billion. The soundest business case for the FI therefore is for them to invest in Treasury Bills and rake in profit at ease. It is expected that if the business can do without credit it would continue to operate in dire straits but if not, then they (especially small businesses) would turn to the very high interest charging institutions for credit. The ramifications of the continuously increasing base rate to businesses is dire and the earlier such indicators are softened the better.
By: Yaw Korankye Antwi || ghanatalksbusiness.com
