The Monetary Policy Committee of the Bank of Ghana has maintained the policy rate at 14.5 percent after a similar decision in May and July of this year. This makes it the third consecutive time the policy rate has being maintained in 2020.
The rate is of keen interest to businesses, as it signals the rate at which the Central Bank will lend to commercial banks, and will subsequently influence average lending rates on loans to individuals and businesses.
In March this year, the seven member Monetary Policy Committee which meets bi-monthly over a three to four-day period to assess current economic conditions and the country’s inflation outlook, reduced the policy rate by 150 basis points from 16 percent to 14.5 percent. The figure has since been maintained in May, July and September of 2020.
Speaking at the 96th MPC Press Conference, Dr. Ernest Addison, the Governor of the Central Bank of Ghana, said the decision to maintain the policy rate for the 3rd consecutive time at 14.5 percent, was necessitated by the fact that following a period of uncertainty, drivers of our economic growth, like our export receipts, financial sector performance, currency and international reserves, are returning to normal, and also because Monetary and Fiscal policies have been supportive enough to ensure the economy remains strong to withstand any shocks in the short to medium term. Here is the governor breaking down some of the committee’s reasons for maintaining the rate.
“On the real economy, despite the contraction in the second quarter, the indication is for improved growth outturn in the third and fourth quarters. Leading indicators of economic activity point to a recovery. A sustained
level in consumer and business confidence, broad-based growth in the indicators of the CIEA are all supportive of positive growth conditions in the outlook. Following from the above, it is estimated that growth in 2020 will be between 2.0 and 2.5 percent.”
“Monetary and fiscal policies have also been supportive, providing the necessary underpinnings for the economy to withstand the negative shock arising from the pandemic. However, this has come at a cost of moving away from the consolidation fund and propose a risk to long term macroeconomic stability in decisive measures are not taken to defy the feasible fiscal adjustment to stabilize debt. Under the circumstances, the Committee’s view is that the immediate outlook for inflation and growth are well-balanced and decided to keep the policy rate unchanged at 14.5 percent,” the Gove said.
Earlier Monetary Policy Rates
In January this year, the Monetary Policy Committee of the Bank of Ghana voted to maintain the policy rate at 16 percent. This was the sixth time the rate had been maintained at 16 percent.
In March this year, the Monetary Policy Committee (MPC) of the Bank of Ghana, reduced the policy rate to 14.5%.
The decision according to the Governor of the Central bank, Dr. Ernest Addison, was based on uncertainties in the economy caused largely by the Covid-19 pandemic.
Lending rates dropping but not fast enough – MSMEs
Despite the Monetary Policy Rate (MPR) remaining at 14.5 percent for the better part of 2020, average lending rates of commercial banks have not dropped low enough for many stakeholders.
According to the Summary of Economic and Financial Data released by the Bank of Ghana in May this year, Commercial Banks started the year lending at an average rate of 23 percent, at a time when the monetary policy rate was 16 percent.
Currently, some banks are lending on average at 21 percent as the Monetary Policy Rate continues to hover around 14.5 percent.
Banking Consultant, Nana Otuo Acheampong gave reasons for the situation in a Citi Business News interview.
“To start with, the rate has been dropping from the thirties and forties and now it’s in the twenties and even in the tens. Now, there are two main types of loans and lending rates –the corporate and personal. Usually, the corporate ones are secured and the more security you have, the lower the interest rate becomes. The monetary policy rate now is 14.5 %, and at the corporate level, the actual blue-chip companies are borrowing near the MPC rate of 14 % to 15 %. But when it comes to the personal level, where they are usually unsecured, then because of the risk factor, risk being that the chances of the borrower not being able to pay, then it means the bank has to add a risk premium and that is presently around 20, 22 or 23.”
To see to the reduction of lending rates from the highs of over 30 percent in years past, the central bank in 2018 introduced a new reference rate for lending.
The Ghana Reference Rate (GRR), is to serve as a guide in the setting of interest rates on loans by all banks. It is referred to as the new base rate.
The GRR began the year at 16.13 percent and has dropped to 14.77 percent.
It is interesting to note that in the months after the first case of COVID-19 was recorded in Ghana, the GRR started dropping albeit marginally which translated in a corresponding marginal drop in average lending rate.
Nana Otuo Acheampong further explained the dynamics of the current pandemic and how it is keeping interests rates from dropping further.
“Over and above all these, we are not in old times, we are in the new normal. And in the new normal, the chances of loans either going bad or becoming doubtful are real, in the sense that, people who borrowed before the COVID-19 pandemic, now they’ve used the money and their businesses have either come down or in some worst cases collapsed completely. So that risk is also adding to a mountain of non-performing loans and the higher non-performing loans we have, the dearer the cost of borrowing becomes because we have to share that risk,” he added.
The monetary policy rate generally signals the rate at which the Bank of Ghana lends to commercial banks. This also influences the final interest rate corporate entities and individuals pay on the loans they take from the commercial bank.
Though the rhetoric however over the years from many micro, small and medium scale enterprises when it comes to loans is the fact that even when the Central bank reduces its Monetary Policy Rate, the transmission mechanism which should see a commensurate decline in lending rates of commercial banks does not apply, many of these companies are hopeful of a change in the coming days.