The Monetary Policy Committee’s decision to hold the policy rate at 25.5% is a worry to many but surprise to a few. Analysts in pre-announcement commentaries had forecasted a possible drop, or a hold in the worst case scenario. Businesses on the other hand had hoped for the former at the back of the possible positive implication on their borrowing need. To the Bank of Ghana, the baseline factors provided plausible case to keep it tight.
Of all the driving factors, exchange rate seem to have pulled the greatest punch given that the Cedi has depreciated about 8% between December 2016 and the present January against the greenback. This has the tendency to worsen, given the far-away pass through repercussion of promised unprecedented spending by the Trump administration and the possibility of attracting yield-conscious investors back into the US economy. The exchange rate can only possibly point to the north. This coupled with the expectation that the current administration (Ghana) will most likely borrow significantly to invest in providing enabling environment for the private sector to flourish, will not bid well for rate cut.
Whilst the above macro and fiscal considerations pose concern, what is truly worth considering by supporters of rate easing is marketplace happenings and what is driving cost of fund. This can lie in sharp contrast and have little bearing on policy rate depending on the angle of thinking. Policy rates are what it is, policy rate. It communicates backwardly of what happened in the previous quarter and the BOGs expectation of what should happen in the next. Holders of loanable funds only consider two things when determining where to deploy the cash asset; risk and where the highest yield-opportunity lies, albeit risk free rate which is linked to government bills is a significant consideration in yield determination.
Lenders and their risk-conscious nature always have a good idea of the returns they seek. And many signals and expectation are driving this yield stance. Take the current situation for instance, GoG Treasury Bill rate has dropped sharply below 17% compared to the over 23% a few months back. Whilst this drop is undeniably massive, it has done little to shake-down the interest rate at which financial institutions are lending. This is largely because the current TBill rate position is not expected to last. As a result, lenders are refusing to price-in the effect which they suspect will not last anyway. On the flip side, same expectation is driving the high-yield stance of surplus holders as they seek high Fixed Deposit rates from banks. In addition, the situation is also being helped by non-banks taking funds at high cost to meet pressing liquidity needs as they continue to take abnormal returns on micro lending.
In the bid to stay away from the predictions, a number of moves however seem plausible given the uncertainty in the midst of marketplace optimism. Rate movement will be informed by how government will fund its promised projects of transformation and how this will impact the extent of borrowing on the domestic market, assuming the status of oil revenue flow remains unchanged. Even if the government does not fall on raising debt finance locally, the share spending, plus exchange rate deterioration will most likely trigger inflationary pressures to drive tight monetary policy measures. Although it is expected that some policy intents of the new government such as the reduction in taxes and others will propel productivity to impact on GDP and eventual increase in tax revenue, analysts see this possibility only in the long term.
Banks will also be scanning the environment for signs of confidence and business opportunity to consider ease in risk premium which is a significant component of lending rate. Data challenge however means that, these signals will be sought from intense engagement and meaningful conversation with customers, especially those driving big-ticket transactions. What is however certain is that, customers will have to ask for and fight for rate reduction from their bankers at the back of strong case of repayment capability from strong sales, both historic and projected.
Whilst businesses will find the rate hold indecisive and thus unsettling, it will have to hold a little longer for the next three months of 2017 for a much clearer outlook. No significant economic move by the government is expected during this period apart from the expectation to fulfill some campaign promises such as restoring Teachers and Nursing allowances, which will only drive expenditure pressures. Thus in the absence of any significant move, what will be closely watched is exchange rate movement which has been judged by history to be perhaps one of the few factors capable of driving the quickest change in inflation and thus policy rate.
Author: Ellah Makuba