Raise interest rates to stop cedi’s freefall – Finance Lecturer to BoG
The Bank of Ghana has been urged to raise interest rates in the country to help stop the free fall of the Ghana cedi.
Valley View University Chief Financial Officer Dr Williams Peprah says higher interest yields will encourage investors to buy more government securities and help slow the cedi’s depreciation, despite the difficulties it will bring. to the economy.
“When a country’s currency suffers from devaluation, as we experienced in Ghana in the first 2 months of the year, where we have the worst performing currency, the only alternative to stop the devaluation is to raise interest rates in the country”.
“This means that instead of investors or citizens not having confidence in the currency but buying dollars or foreign currencies to save, the government will entice them with an increase in interest rates; so they buy government bonds and government securities,” Dr. Peprah pointed out.
For him, it is a strategic decision to save the cedi and “it is the known interest rate parity”.
Already, interest rates have risen as the 91-day bill yield crossed the 13% mark for the first time since 2017.
Dr Peprah said raising interest rates at this time is inevitable to save the cedi from further depreciation, adding “it is a major principle in controlling a situation where a country is experiencing a devaluation in the rate of exchange”.
However, he said, “The implication is that the cost of living, or the cost of borrowing, will become expensive in the country, and that will slow down the economy for a while, but that’s in the best interest to control the wide margin spread between the foreign exchange market and the Bank of Ghana exchange rate”.
The local currency started the year at around 6.40¢ to the dollar, but with only two months out of the year it stands at 7.15¢.