The rate at which Bank of Ghana (BOG) lends money to commercial banks, now stands at 23.5%.
This implies a reduction in the rate helps banks borrow money at a cheaper rate and vice versa. Whenever banks have any shortage of funds, they can borrow from Bank of Ghana (BOG).
Now, a reduction in the key interest rate will have the following impacts:
Effect on consumers:
Now that banks will start to reduce the interest rates but lower interest rates also mean that you lose out on a higher return on your fixed deposits as banks reduce rates proportionately to protect their margins. Pensioners who depend on bank deposits are the worst affected in a low interest rate cycle.
Start-ups can also avail loans at a lesser rate as banks and other lending institutions compete with each other to offer loans at the most favorable rates.
Price of commodities:
It is not necessary that prices of commodities have to come down when interest rates go down. But if it does, it is beneficial to invest in say gold or appreciating assets such as real estate and book profits when they rebound, rather than spending on consumables.
When capital becomes cheaper, companies tend to expand their operations, thus, generating employment as they would need more manpower.
This, coupled with government reforms will increase industrial output, and hence Gross Domestic Product.
The positive impact on consumption along with lower interest outgo would also mean high profits and thus better valuations for the equity market. Further, lower interest rates means that money will move from lower yielding debt instruments to the risky, but high return yielding equity market.
It is unwise to park your money with the bank when interest rates come down. This is because earnings on your fixed deposits will be negligible at a time when economic activity is high because banks do not want to take the risk of raising high-cost funds at a time when borrowing rates are falling.
Rather, it is advisable to liquidate short term fixed deposits and invest in less risky mutual funds or government infrastructure bonds, keeping your long term fixed deposits safe.
Author: Gabriel Ofori Yeboah (Author) Investment Guide (Forex Trading), Business Analyst.
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