For the fourth consecutive time, the Bank of Ghana Monetary Policy Committee has maintained the monetary rate at 14.5% citing ease in inflation and the improved macroeconomic outlook. The announcement came on Monday 23 November at the 97th MPC Conference that streamed live on Facebook.
The announcement to maintain policy rate at 14.5% does not come as a surprise as Dr. Ernest Addison in the past week hinted at maintaining the policy rate.
“We probably need to have patience to allow the system to consolidate itself and expected interest rate to go down consequently. And I (Dr. Ernest Addison) said so that if you look at the profile of policy rate over the last three years, we have consequently gone down till January this year when we stopped at 14.5% and the monetary policy rate have sort of stayed there. They are reasons why it has stayed there; we are looking at the impact of the shocks, the impact of the shocks on government finance and budget,” he said.
Based on the above statement, the seven-member committee, chaired by Bank of Ghana Governor, Dr. Ernest Addison had intended to maintain the policy rate at 14.5% to continue in the effort to reduce inflation and interest rate, as well as regulate money supply in the short term.
Speaking to the press at the 97th MPC meeting, Dr. Ernest Addison said macroeconomic conditions had improved with ease in inflation to 10.1% in October from 11.4% in September.
“Inflation is almost at the upper band target. The fiscal and monetary policy measures, which have increased liquidity in the economy, appear not to be impacting the rate of price increases, partly due to the existence of the output gap,” Dr. Ernest Addison said.
“Global conditions continue to be supportive, domestic inflation is easing, growth prospects are improving, crude oil prices have stabilized, monetary aggregates have expanded but with minimal impact on inflation, the current account deficit is stable, remittances inflow has remained firm, the exchange rate has been stable and reserve buffers continue to remain strong,” he further said.
What 14.5% Policy rate means to your pocket
To the borrower, who is seeking to raise some funding through credit, maintaining the policy rate, to a large extent implies that Bank lending rates will remain unchanged, hence no increase in cost of borrowing.
However, there are other factors that may trigger an increase in bank lending rates irrespective of policy rate unchanged; the continuing rise of cost of doing business and the dollarization of the economy. Borrowers (individuals or businesses) should also be aware they may incur other costs like loan monitoring fee, processing fee and cash locked up as collateral, which could still make cost of borrowing quite significant.
It is expected that loan monitoring fee could shoot up because there is more pressure on banks now to maintain asset quality and monitoring is one way to achieve that. So lending rates may be unchanged but beware of the other charges that may make general cost of borrowing increase. A borrower can however negotiate on interest rate and other loan charges.
For the individual investor who may be seeking high yielding interest-bearing instrument, it is definitely not welcome news because of the downward trend in returns on investments.
Returns on fixed income investments have remained mostly unchanged for the length of time that policy rate has been maintained at 14.5%.
In the near future, individual investors with an appetite for risk could turn attention to the equity sector. Activity may shift there, as experts anticipate a rallying of the Stock Market.
Maintaining the Policy rate also implies that banks would may keep the fixed deposit and savings rates unchanged.
With policy rate remaining unchanged, value in current bonds is not expected to change, hence not a good time to off load on secondary market.
Institutional investors may turn attention to the stock exchange. Once again, the expected rallying of the market offers an alternative to institutional investors. The time to invest in the stock market is now, as average stock prices are low.
Business confidence on the rise
According to Dr. Ernest Addison, both business and consumer confidence had improved and currently above pre-lockdown levels. An indication that business activity is normalising. Also a piece of welcome news for micro and small businesses who have suffered revenue shortfalls as a result of the effects of the pandemic.
A bounce back of business activity implies individuals will have money to spend especially during the upcoming festive period.
He however stated that there are some “key risks.”
“The key risks, however, are the evolution of the budget deficit and the financing needs to support budget implementation and the uncertainty surrounding the COVID-19 pandemic,” he said.