The Bank of Ghana (BoG) has addressed a key issue raised by Togbe Afede XIV in his recent article, clarifying that the Central Bank does not benefit from high interest rates. In a flyer shared with the media, the BoG asserted, “On the contrary, high interest rates raise the cost of Open Market Operations and lead to Central Bank losses.”
In his article, he criticized the BoG, claiming that the Central Bank benefits from the high interest rate regime it oversees. He argued, “The stark reality is that BoG is in a financial quagmire because it may find it difficult to meet its operating expenses when interest rates fall significantly.”
Togbe Afede XIV, founder of SAS Financial Group, highlighted that BoG’s “interest and similar income” totaled GH₵5.09 billion in 2022, accounting for 92.7% of its total operating income of GH₵5.49 billion. He contended that if BoG’s policy rate were to drop from 29% to 14.5%, the Central Bank would lose nearly half of its income, making it challenging to cover operating expenses, including GH₵1.62 billion in staff costs. This equates to GH₵735,361 per employee annually, or GH₵61,280 monthly per employee.
Without directly referencing Togbe Afede XIV’s article, the BoG circulated a flyer on its social media platforms refuting his claims. The flyer stated that high interest rates are “a necessary price to pay to bring inflation down.”
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For years, the BoG has employed an inflation-targeting policy, which involves raising its policy rate when inflationary pressures are high. The rationale is that higher policy rates lead to increased lending rates, discouraging borrowing and reducing demand for goods and services, thereby lowering inflation.
However, many experts disagree with this approach. Dr. John Kwakye, Head of Research at the Institute of Economic Affairs and a former external member of the Monetary Policy Committee (MPC) of the Bank of Ghana, recently tweeted that inflation in Ghana is primarily driven by supply-side factors rather than demand. He suggested that raising the policy rate to suppress demand is not a viable solution.
Experts aligned with Dr. Kwakye argue that suppressing demand through high interest rates only increases the cost of borrowing. This, in turn, hurts businesses and individuals who will borrow regardless and pass on the increased costs to consumers, potentially driving inflation up further in the long run. They point out that inflation in Ghana has often risen after brief periods of lower rates, to justify their argument. Despite these criticisms, the BoG has steadfastly defended its policy, maintaining that raising interest rates is essential in combating inflation.
Recent data from the Ghana Statistical Service shows that producer price inflation rose from 15.3% in March to 16.8% in April, indicating a potential rise in consumer price inflation in May. This complicates any decision to reduce the policy rate, as advocated by Togbe Afede XIV and Dr. Kwakye, when the MPC meets from May 22, 2024.
