The central bank Governor Dr. Ernest Addison has said a longer period of “sustainability” is needed before commercial banks’ lending rates will trend downwards to reflect the central bank’s loosening of monetary policy.
With the Monetary Policy Committee of the central bank reducing its policy rate by 100 basis points to 20 percent, and inflation falling to 11.6 percent, the lowest in four years, among other things, the central bank governor pleaded banks be allowed more time to correct some of their structural imbalances that will allow lending rates to decline.
“We think given the sustained reductions that we are seeing, the banks will eventually have to come down on their lending rates. We have seen some movements this year and we know that if we sustain the trend that we are seeing with inflation and policy rates, lending rates as part of the market, will eventually come down.
Obviously, the speed at which the lending rates will come down is hindered a bit by some of these structural issues in the sector including the high level of non-performing loans. The inefficiencies in the banking sector would have to be worked on and then we can expect that once those efficiencies are made, then we’ll see a faster transmission of the policy rate into the lending rates,” the governor said a press meeting on yesterday to announce the policy rate action.
According to the central bank’s latest report on lending rates charged by commercial banks, consumers are still paying above 30 percent to access credit facilities although the cost of lending since the turn of the year has declined by about two percent.
The last time the policy rate was this low was in May 2015 when the policy rate was pegged at 21 percent having been tightened by the central bank the year before.
Policy rate action
In what was the bank’s last monetary policy committee meeting for the year, the governor said the decision to reduce the rate is underpinned by the fact that all the indicators of economic activity and business and consumer confidence remain strong.
According to him, inflation expectations remain subdued, with core inflation measures in line to achieving the medium-term inflation objective with the local currency, depreciating by about 5 year-to-date, also remaining relatively stable on the foreign exchange market, despite recent movements which are not a reflection of the underlying fundamentals.
The country’s balance of payments position remains robust with a projected trade surplus and reduced current account deficit in 2017 and on track to build up over US$700 million additional reserves this year alone, to bring total gross international reserves to US$7.4 billion.
“The initial fragilities in the banking sector have largely been contained and efforts are being made to strengthen the sector, including enhancing supervision and increasing the minimum capital requirements to ensure stronger and well-capitalized banks that can support the government’s transformational agenda.
Looking forward, the prospects are for strengthening the current macroeconomic performance by consolidating gains made so far in fiscal adjustment and prudent monetary management, underscoring the policy commitment to macro-stability,” Dr. Addison stated.
According to him, the central further observed a return to the disinflation path with the Bank’s latest forecast indicating that the bank can indeed achieve its medium-term inflation target of 8±2 percent in 2018.
“This forecast is however contingent on continued improvement in the global economic environment including oil price changes, stability in the foreign exchange market and achieving the medium-term fiscal targets,” he added.