Policy rate hike could hurt equities market – Analysts

Even though it is the likeliest outcome of the Monetary Policy Committee of the Bank of Ghana (BoG), an upward adjustment to the monetary policy rate could have an adverse effect on the equities market – possibly eroding recent gains, market analysts have said.

With rising inflation, occasioned by food and fuel prices and worsened by the ongoing geopolitical tension between Russia and Ukraine – coupled with the local currency rapidly diminishing in value against major trading partners, analysts are anticipating a policy rate hike in the region of 100 to 200 basis points.

Speaking to B&FT ahead of the announcement of the Monetary Policy Committee’s (MPC) decision, and possible implications for the domestic stock market, Head of Research at Databank, Alex Boahen, said despite his agreement with the need to raise the rate from 14.5 percent – especially on account of inflation being at 15.7 percent for the end of February, the decision is likely to hurt non-bank listed companies.

He reasoned that a high rate would translate into a higher cost of credit for the listed companies – most of which have demonstrated strains in their full-year financial statements. Additionally, domestic investors will gravitate toward the fixed income market, compounding the woes of listed companies.

“There is strong competition for funds between the equities market and fixed income market, and the cautionary stance of pension funds toward equities has not been of much help – albeit with some recent progress. But if the BoG should hike the policy rate, which for me is the right thing to do because inflation is now above the policy rate, in about 6 months we should see lending rates become aligned with the policy rates.

“If they hike the rates, lending rates are likely to go up in the coming months; and when that happens we will see the fixed income market become more attractive, especially for domestic investors,” he explained.

“Already, we are seeing impacts of the tight conditions on financials of the listed companies. For companies with high leverage, that is debt; they will have to pay higher rates and that can hurt their companies. However, if we look at it, the net effect is likely to be negative,” Mr. Boahen said.

Databank’s Head of Research however stated that it remains unlikely that an upward adjustment to the policy rate alone will be sufficient to assuage concerns of market players.

“I don’t think that with the comfort that the market is seeking, announcing a higher policy rate alone will be able to appease current concerns,” he said.

In a similar view, the Dean of the University of Cape Coast (UCC) Business School, Professor John Gatsi, offered a sombre outlook for the market in the short-term.

“The GSE has done remarkably well with the equities market recently, but we know that the prevailing preference is the security – perceived or otherwise – that comes with the fixed income market; and I cannot see how higher interest rates will not result in a flight from equities,’ he said.

The GSE has traded relatively flat for the third week in March, closing the week with a -1.81 percent year-to-date return.