Bankers are asking the Bank of Ghana (BoG) to do what it barely does; use the base rates of banks as a guide to jack down its policy rate in the next review window.
With base rates tumbling below 20 per cent, the Ghana Association of Bankers (GAB) contend that leaving the policy rate at 23.5 per cent creates a disconnect between the two indices, hence the need for a downward review to bring the regulator’s benchmark rate in tandem with banks’ minimum cost of funds.
“If my base rate is 18 per cent and the policy rate is still 23.5 per cent, that is almost 500 per centage points difference yet that policy rate is supposed to be the lender’s of last resort interest to the bank, then there is so much disconnect there,” the President of the GAB, Mr Alhassan Andani, said.
“If my base rate is 18 per cent, then remember that my internal cost of funds is much lower than the 18 per cent. So, really, what does that 23.5 per cent from the central bank mean,” he asked in an interview on April 29.
After failing to contain inflation, an economist and Senior Research Fellow at the Institute for Fiscal Policy (IFS), Dr Said Boakye, said in a separate interview that the BoG ill do the economy a lot of good if it allowed its policy rate to continue going down.
“They should allow the prime rate to keep on going down and it will help the real sector. Increasing the rate is not solving the inflation rate but it is affecting the real sector, so just allow it to go down,” he said.
Stiff monetary stance
After signing onto a three-year Extended Credit Facility (ECF) with the International Monetary Fund (IMF) in April 2015, monetary policy has been on a tight stance as the government, guided by the fund, struggled to feign off the impact of expenditure overruns on the economy.
Since then, the policy rate has gone up three times, rising from 22 per cent in May, 2015, to 26 per cent in November the same year.
It was subsequently left unchanged until November, last year, when it was eased to 25.5 per cent.
The rate was, however, lowered by 200 basis points to 23.5 per cent in March, this year in a historic move that surprised some analysts but excited the private sector.
Although the rate of response from the banking sector has been slow, some banks are now beginning to lower their base rates after consistent declines in Treasury bill rates and inflation strengthened their hopes that some stability was returning to the economy.
Stanbic Bank, for instance moved its base rate to about 18.5 per cent similar to its counterparts.
With the BoG policy rate serving as a benchmark rate for lending, Mr Andani said having it higher than banks’ base rates was a bit unusual.
“It is a surplus number but it should move in tandem with indicators or pressures in the market because if you now see,” he said.
That notwithstanding, a banking consultant, Nana Otuo Acheampong, said having the base rates below the policy rate was “delusional.”
“Those who set below the policy rate are only deluding themselves because the base rate is the rate at which a bank must not lend below.”
“So, if your base rate is below 23.5 per cent, it means that bank will not lend to you below that rate and that is fine but the truth is none of the bans will lend to you that way; they only set it theoretically,” he said.
With the BoG being the banker of last resort, Nana Otuo, who is the Principal Consultant at the Osei Tutu II Center for Executive Education and Research (OTCEER), wondered how the banks, which are the students, will be better than the central bank, which is the teacher.
“If the teacher is leading at 23.5 per cent and you are saying that you will lend to me at 19 per cent, then I wonder how possible that can be,” he said.
He explained that banks will normally use their base rates to bit customers into doing business with them.
Once they get in, he said issues of high risk premium, lack of proper address system and cost of funds will begin to pop up and that will ultimately push the interest on their loans to the high sied.
He, however, admitted that the policy rate needed to be reduced but in tandem with current happenings in the economy.
Source: Daily Graphic