Assessing the Impact of Interest Rate on Foreign Exchange Rate in Ghana

Dickson Akoto

doi:10.11648/j.ijafrm.20200504.12

Abstract

Foreign exchange rates determine the strength of a nation’s currency against other nation’s currency. Determination of foreign exchange rates in Ghana is therefore, of immense importance since the livelihood of many people in the country is tied to the performance of the local currency against the foreign currencies. Data from books and journals were used as the basis for the research; the research result was then compared to the work of earlier writers to ascertain the conformity or otherwise of the Ghanaian situation. The research involved comparing the percentage changes in interest rates of commercial banks in Ghana to the percentage changes in exchange rates for the period 2008 to 2018 to ascertain the relationship between the two variables. Quantitative research design was used for the work. The researcher determined the mean and standard deviation of the distribution and computed the coefficient of correlation for the variables and in addition the regression analysis. The coefficient of correlation was -0.5 and the gradient of the regression line was also -.05. The research showed that interest rates were strongly negatively related to the exchange rates in Ghana for the period 2008 to 2018. This explained why exchange rates in Ghana kept falling while interest rates rose continuously which is contrary to postulates that indicate, a rise in interest rates results in rise in exchange rates. The researcher noted that the great disparity between the lending rate and deposit rate in Ghana is a contributing factor to this anomaly.

Highlights

Foreign exchange operations in Ghana have been of much concern to many people, especially after the country changed its foreign exchange policy from fixed exchange rates to flexible exchange rates
The results of the research indicate that increase in interest rate in Ghana results in fall in the country’s exchange rate
High interest rates in Ghana negatively impacts the exchange rate. This finding defeats postulates that indicate that high interest rates result in high exchange rates

Summary

Introduction

Foreign exchange operations in Ghana have been of much concern to many people, especially after the country changed its foreign exchange policy from fixed exchange rates to flexible exchange rates. The country has experienced falling exchange rates for decades. The state in a bid to perhaps, reduce the constant fall of the currency decided to artificially peg the dollar to the local currency, the cedi, at $1 to 1 cedi on 1st July 2007. This situation did not last, since many factors accounted for the value of a currency. As at the time of writing this article the dollar is worth GHc 5.6, a fall in exchange rate of 460% over the period

Methods

Results

Conclusion