Financial Economist and Senior Lecturer at the University of Ghana Business School, Dr. Lord Mensah, says it will be prudent for the Bank of Ghana to reduce the monetary policy rate from the current 16 percent, to improve the liquidity situation in the country.
The policy rate, which determines the rate at which commercial banks borrow from the Central Bank, has been kept at 16 percent for the past 12 months.
Ahead of the first monetary policy rate announcement on Friday, January 31, 2020, Dr. Lord Mensah says a further reduction in the rate will aid in the expansion of the economy due to the rigorous financial sector clean-up in the past 2 years.
“You want to adopt that kind of expansionary approach where you lower the rates for people to have access to funds through the financial system. So for me I’m expecting the policy rate to be reduced. Going into an election year I believe that the monetary policy committee will like to improve the liquidity situation in our system. By liquidity I mean access to funds and funds exchanging hands. If the policy rate is increased, then we can’t improve liquidity. So at worst, I expect it to be maintained.”
Economist predicts Bank of Ghana will maintain policy rate at 16 percent
Economist, Prof. Eric Osei Assibey, says he is anticipating that the Monetary Policy Committee of the Bank of Ghana will keep its policy rate unchanged at 16 percent.
The MPC is expected to conclude its first meeting for this year on Thursday January 30, with an announcement of its policy rate on Friday, which determines the rate at which banks borrow from the central bank.
The last time the monetary policy rate was changed was in January 2019, with the MPC subsequently maintaining the rate at sixteen percent for the rest of the year.
Though Prof. Assibey admits that an unchanged policy rate could impact consumers adversely, he believes the central bank could persuade banks to reduce their lending rates to customers.
“I will expect that the central bank maintains the policy rate or even if it is going to reduce it, it should be very marginal. I think reducing it at this time is not advisable. I think what the central bank can do now is some kind of moral suasion on the part of banks to close the gap between the policy rate and lending rate.”
“The lending rate responds to the base rate. The reference rate has been quite sluggish, and it has been very slow, and the lending rate still remains relatively high,” Prof. Assibey said.
Prof. Assibey’s remarks come after inflation, which is one of the biggest determiners in the policy rate direction, ended 2019 within the bank’s target of 8±2.
Another factor, the local currency, has enjoyed some relative stability since the beginning of the year, but the central bank will very much be guided by last year’s capital flight caused by an unexpected reduction in the policy rate in January 2019.
The policy rate was reduced by 100 basis points which meant that interest rate would take a hit; a situation that forced foreign investors in the country’s capital market to move their funds to areas where they are likely to get a bigger interest for their investment.
The situation forced the cedi to a free fall as investors chased limited forex to repatriate out of the country.
Reduction in future
Having held the policy rate for about a year, there are indicators that the rate will be reduced eventually in the not too distant future. One such organization predicting this is the Economist Intelligence Unit (EIU).
The EIU in its country report on Ghana said inflationary pressures which remained elevated throughout 2019 is set to moderate.
The firm argues that given the slowdown in inflation, there will be grounds for the Bank of Ghana to reduce its interest rate as it bids to support lending to the private sector.
Ghana’s inflation currently stands at 7.9 percent but the EIU predicts that the rate will largely remain unchanged throughout the period.
The Monetary Policy Committee in its last meeting unveiled a number of measures it hopes to undertake to further reduce the high cost of lending.
According to the central bank, data presented to the Committee revealed that factors such as high operating costs of banks stemming from operational inefficiencies among others, when addressed would help lower lending rates.