Reduce policy rate to inject liquidity into financial sector –  Economist to BoG

As the Monetary Policy Committee (MPC) of the Bank of Ghana prepares to announce its policy rate decision today, Friday, May 14, an Economist, Dr. Lord Mensah, is optimistic the Committee will further reduce the policy rate to mitigate the impact of the COVID-19 pandemic on businesses and individuals.

He explains that reducing the policy rate will also help to bring down the interest rate and reduce the cost of borrowing.

In response to the COVID-19 threat, the Bank of Ghana reduced the policy rate earlier this year by 150 bases points, that is from 16 to 14.5 percent.

The policy rate, which is the rate at which the central bank lends to commercial banks, affects the cost of borrowing.

Speaking to Citi Business News, Dr. Lord Mensah said reducing the policy rate will help inject liquidity into the financial sector.

“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.

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.