The Monetary Policy Committee of the Bank of Ghana has cut the policy rate by 150 basis point from 22.5 percent to 21 percent due to the downward trend in consumer inflation.
Dr. Ernest Addison, Governor of the Central bank disclosed this in Accra added that the Central bank’s surveys on price growth “suggest dampening of underlying inflation pressure.”
Prior to this latest cut, the Central bank had cut the Monetary Policy Rate by 300 basis points this year, trailing the 420 basis point decline in the 91-day treasury bill rate. It means the Policy Rate was reduced more than Treasury Bill
But what analysts and players in the banking and finance sector of the economy make of this new rate cut?
Arnold Parker is the Managing Director of finance house afb and he believes it’s a good signal for the local economy and will eventually lead to further declines in lending rates in the economy. According to Trading Economics (an economic analysis portal), bank lending rate in Ghana remain unchanged at 38.30 percent in April from 38.30 percent in March of 2017. Bank Lending Rate in Ghana averaged 29.04 percent from 2005 until 2017, reaching an all-time high of 42.84 percent in July of 2016 and a record low of 21.24 percent in March of 2008.
Lending rate: the rate of interest charged by a financial institution for lending money.
“the increase in lending rates will have a negative effect on economic growth”
Dr. Saint Kuttu, a lecturer at the Finance Department of the University of Ghana Business School, Legon also asserts that, the reduction of 150bps will not have a significant effect on lending rate. “The default risk build-up in the premium on the pricing of credit is still high, and a myriad of factors are responsible for that.” He further stressed that, until the price of those factors come down, the banks will be reluctant to reduce their lending rates significantly regardless of what the BoG will want then to do.
Below is an analysis shared by Henry Kwadwo Kyeremeh, a financial analyst.
The revision of the MPC rate downward reflects the steady decline in inflation witnessed recently. The 2017 budget anchored the financing of the deficit through domestic borrowing. This strategy has worked in the sense that the government has been able to take significant amount from the system, hence reduction in inflation. The downward review of the rate would lead to a reduction in interest rates charged by the various banks as the prime rate is the base for setting interest rate commercial banks charges on loans. More business should be able to borrow at relatively cheaper cost and that is a good news for the banks and the general business environment. In the long run, the policy should make the business community viable to attract further investment which would generate growth and employment the economy needs badly.
The considerations for this cut in the policy a due to several factor, among them includes;
• Foreign exchange market conditions have generally remained stable. This is supported by improved liquidity conditions, trade surplus and increased reserves.
• The 91-day treasury bill rate, used by banks to determine their lending rates, also eased 417 basis points since January to 12.6 per cent on July 21.
• The governor also added, the disinflation process “is still ongoing and this trend is likely to continue all through till the end of the third quarter.”
Can this new rate be sustained and what does it mean for the banks and businesses?
Patrick Stephenson, a financial analyst believes banks posting Non-Performing Loans at 21.7 percent will obviously not result in the reduction even though the policy rate has been reduced. “This means for every cedi of loan the bank gives out, 22 pesewas will not be paid back,” he added.
The objective of the policy rate is never to reduce the cost of credit, “it is to track inflation, anchor it and make it predictable,” he asserts.
Yaw Korankye Antwi of www.ghanatalksbusiness.com also believes that the decline of the policy from 25.5% in January 2017 to 21% in July 2017 is a good place to start in stabilizing the economy and fighting inflation. However lending rates would still remain high due to the dollar rate which still remain high at $1:Ghs4.41. as at 25 July 2017. This is due to the highly dollarized nature of the economy which directly impacts the cost of doing business. Businesses should still expect to pay high for their borrowing with the average borrowing rate at 30.8%. Coupled with the longer time it takes banks to adjust rates downwards when policy rate drops, it is expected that lending rates would still hover in the 30s till the end of the year. The general environment may not feel the impact of lowering inflation until the policy rates continuously decline into the teens and dollar rates also dip. May be, let us wait till the year ends to feel something significant.
Author: Paa Swanzy-Essuman || p.swanzy@ghanatalksbusiness.com
