The Bank of Ghana’s (BoG) decision to raise the policy rate by 100 basis points to 28% has drawn criticism from Prof. Isaac Boadi, Executive Director of the Institute of Economic and Research for Public Policy (IERPP).
He claims that the action will make consumers’ and businesses’ financial difficulties worse.
In an interview with Atinka FM, Prof. Boadi clarified that changes to policy rates have a direct effect on borrowing costs, which banks then pass on to consumers and businesses. According to him, the most recent increase would result in higher loan interest rates, which will make it more expensive for companies to access credit.
He cautioned that doing so might lower corporate investments, raise the price of products and services, and eventually impede economic expansion.
“When the central bank raises the policy rate, commercial banks also increase lending rates. Businesses then pass the burden onto consumers, leading to higher prices and reduced spending power. The result is economic hardship,” – he explained.
He admitted that containing inflation, which is currently at 23.1%, is one of the main goals of raising the policy rate. He questioned the efficacy of this strategy, claiming that it can have both beneficial and detrimental effects.
“For businesses with high debt, this decision will be a major challenge, as they will have to borrow at higher costs. On the other hand, savers may benefit from higher interest rates on their deposits. But in a country where a significant number of businesses depend on loans for survival, the overall impact will be largely negative,” – he noted.
Additionally, Prof. Boadi stated that high policy rates can harm small and medium-sized businesses (SMEs), who employ a significant percentage of the workforce, and that the BoG could have taken other economic indications into account before reaching such a decision.
“If businesses struggle to survive due to expensive loans, it will lead to layoffs and reduced productivity, which will not be good for the economy,” – he added.
While acknowledging the Bank of Ghana’s responsibility in stabilizing the economy, he emphasized the need for a more balanced approach to monetary policy to prevent further economic strain on businesses and consumers.
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