Reduced policy rate must reflect in banks’ lending rate – Prof. Assibey

Economist, Professor Eric Osei Assibey, says banks must ensure that the reduction in the policy rate must impact the cost of credit to enable local manufacturers bridge the shortfall in the supply of some goods in the wake of the coronavirus pandemic.

The Monetary Policy Committee (MPC) of the Bank of Ghana has reduced its lending rate to banks to 14.5 percent after its meeting on Wednesday [March 18, 2020].

The Monetary Policy Committee of the central bank said the decision to reduce the policy rate by 150 basis points after staying at 16 percent for seven consecutive times, was influenced by global developments such as the impact of COVID-19.

Aside the tumbling of stocks and the plummeting of prices of commodities like oil, economies have had to revise projected growth targets for 2020.

In Ghana, the pandemic is expected to lead to a shortage of some imported goods from countries like the US, China and other European economies.

It is in the light of these that the MPC said even though inflation is still within the margin of 8 percent plus or minus 2, it considers the need to ease the anticipated burden on businesses.

Professor Eric Osei Assibey in an interview with Citi Business News said banks are expected to trigger the margin of reduction in their cost of credit to businesses.

“It is one thing reducing the policy rate and another thing the banks also reducing their lending rates because banks take into account several other factors including the systemic risks in the system. And so what we expect in this new policy rate reduction will be that the banks and the private sector will also react positively and favourably in a way that will transmit to the ordinary Ghanaian so that the lending rates and interest rates on borrowing will go down significantly,”

Though Prof. Assibey agrees that there is more room for a reduction, he said the COVID-19 presents an opportune situation for the central bank to heed calls for a reduced policy rate.

Meanwhile, the Capital Conservation Buffer which is money that is required of banks in excess of the minimum capital requirement of 400 million cedis, has been slashed by fifty percent.

The buffer is now pegged at 1.5% from the initial 3%.

Again, Prof. Osei Assibey says this should improve liquidity in the system by reducing the risks faced by banks in offering credit to businesses.

“With the buffer reducing to 1.5% meaning that the capital adequacy ratio now has also reduced, so banks don’t have to have so much capital against high risk assets; which then means that the banks can give out more loans even to risky sectors; and so it is all geared towards increasing liquidity in the system,”

For now, businesses will await the impact of the Central bank’s decision even at a time that appeals have been rife for the government to provide stimulus packages to some critical sectors in the ultimate event of a lock down which will affect economic activities largely.