The Monetary Policy Committee of the Bank of Ghana has reduced the Monetary Policy Rate by a 200 basis point from 25.5 percent to 23.5 percent.
Groupe Nduom Research predicted a reduction in the Monetary Policy Rate (MPR) by a 100 basis point last week. The research group made the forecast mainly due to the primary objective of the central bank to ensure price stability and low inflation, to ensure stable local currency (cedi) and support output and employment growth. Analysts predicted that, the central bank will reduce the MPR given the falling inflation trend, the somewhat stabilization of the cedi and the need to consolidate government fiscal policy.
Ghana’s inflation rate is expected to be 15.80 percent by the end of this quarter, according to Trading Economics global macro models and analysts’ expectations. The annual inflation rate in Ghana again slowed slightly to 13.2 percent in February 2017 down from 13.3 percent in January 2017. It has been the lowest inflation rate since November 2013, it was mainly due to a decline in the fuel price.
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But what does this development mean for financial institutions lending to businesses and businesses looking for funding from these financial institutions?
Ghana Talks Business’ (www.ghanatalksbusiness.com) managing editor and a financial analyst, Yaw Korankye Antwi believes, analysts expect the rate to go down more considering where the treasury rate stands currently. The treasury rate stands at 15.7 percent as against the now revised Monetary Policy Rate of 23.5 percent. “We would expect it go down more but I believe that the monetary policy committee might want to manage the very drastic reduction so as not to upset a lot of indicators”, he adds.
What is ‘Monetary Policy’
Monetary policy consists of the actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as modifying the interest rate, buying or selling government bonds, and changing the amount of money banks are required to keep in the vault (bank reserves). – Investopedia
It is highly expected that a drop in the MPR will result in the banks reducing interest rates for businesses to borrow to do business to stimulate economic growth and development. Yaw Korankye adds, “what this means for businesses is that, if the rate at which the banks are borrowing have dropped, it is expected that they will also get financing at a much cheaper cost. However, the 200 basis point is not enough; it may not be able to drive a very significant reduction in the cost of capital for businesses. For me the cost of financing for business may still remain where it is.” It is a good move that the rate has been reduced, however the needed impact may not be felt because the drop is too low to result in a meaningful outcome.
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At the last MPC meeting in January, the MPC upheld the Monetary Policy Rate (MPR) at 25.5%, amid calls by the business community for a lower rate because of the negative effects of the high rate on the domestic economy.
In open economies, exchange rate fluctuations affect the behavior of inflation. This makes the exchange rate pass-through an important consideration with respect to monetary policy.
This move also herald some boosting of confidence in the local economy’s macroeconomic forecasts. The rate of cut is still debatable but confidence in a local economy will go a long way in seeing investors (indigenous and foreign investors) invest in the local economy which will bring about some job creation in the medium term.
On which rate looks viable to drive the expected impact, Yaw Antwi asserts, “the only time the reduction in the rate will make the much expected impact is when the policy rate comes to around 20 percent and closer to the treasury rate which is 15.7 percent, but I don’t believe the 200 basis point drop is going to be so significant for business to feel it.’
The reduction and removal of some “nuisance taxes by government and the consistent decline of inflation in the first quarter of 2017 will augur well for business operations in the country. Additionally, reducing MPR further to catch up with treasury rate and stabilization of the cedi will reduce the cost of doing business in the country.
Author: Paa Swanzy-Essuman || p.swanzy@ghanatalksbusiness.com
