As the Monetary Policy Committee (MPC) of the Bank of Ghana starts its meetings from today, Monday May 11, 2020, an Economist, Dr. Lord Mensah, is urging the Committee to further reduce the policy rate to bring some more relief to businesses and individuals hit by the impact of the COVID-19 pandemic.
He explains that reducing the policy rate will help bring interest rates down and reduce the cost of borrowing.
Following the economic impact caused by the outbreak of the novel Coronavirus in the country, the Bank of Ghana reduced the policy rate by 150 bases point to 14.5 percent last month.
The policy rate, which determines the rate at which the central bank lends to commercial banks, also has an effect on the cost of borrowing as well as how much interest people pay on their loans.
The Ghana Association of Bankers earlier announced a cut in its benchmark interest rate by 200 basis points to mitigate the economic impact of COVID-19 on businesses and individuals.
The 200 basis points reduction in interest rate translates to a 2 percent reduction on bank loans.
Speaking to Citi Business News, Dr. Lord Mensah maintained that a further reduction in the policy rate will send a clear signal to financial institutions to follow suit by reducing interest rates.
“Well, you see that for several consecutive times, the policy rate was not reduced. And this was the first time they reduced it up to 14.5%. So, if you have a trend and there is a certain reduction, you look at the sustainability of that reduction. If they really want to have their policies going through very well or make sure that funds get to the people and businesses go about their normal activities, obviously they have to reduce it further and that would have impact,” he said.
“That once a time in about two years that it was reduced, I would say that it did not have the needed impact, but consistently, if it gets reduced at this time, I am hoping that the banks would respond to it and then various financial institutions will also respond to it,” he added.
As the coronavirus outbreak continues to spread, the negative impact on businesses continue to travel with it. In Ghana, though businesses are already reacting, government has announced some measures to provide some relief.
Last month, government announced the rolling out of a soft loan scheme of six hundred million cedis (GH¢600 million), to support micro, small and medium scale businesses. This is supposed to be disbursed this month.
Also, the commercial banks, with the support of the Bank of Ghana, have also instituted a three billion cedi (GH¢3 billion) credit and stimulus package, to help revitalise industries, especially in the pharmaceutical, hospitality, services, and manufacturing sectors.