Policy rate reaches 3-year low …will the banks respond this time?

Although inflation rose from 10.3 percent in January to 10.6 percent in February, the Monetary Policy Committee (MPC) of the central bank has expressed confidence in the disinflation process, generally, as it voted to reduce the policy rate by 200 basis points to 18 percent.

Addressing the press on Monday after the committee’s 81st regular meeting, BoG Governor Dr. Ernest Addison said the country’s disinflation process remains very much on course, despite the slight nudge in consumer prices recorded last month.

“The disinflation process continued to firm-up over the first two months of the year, with significant moderation in price pressures. Both headline and core inflation broadly trended down, alongside easing inflation expectations – an indication that the disinflation process remains well-anchored,” Dr. Addison said.

The central bank’s latest forecast suggests that the medium-term inflation target of 8±2 percent is likely to be achieved this year.

“The Committee noted that the current inflation forecast provides scope for monetary policy to realign interest rates, translate the disinflation gains achieved so far to the market, and reinforce the fiscal consolidation process by easing the burden of interest payments on the budget. Under these circumstances, the Committee decided to reduce the monetary policy rate by 200 basis points to 18 percent,” the Governor said.

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The new policy rate is the lowest since September 2014, when the rate stood at 19 percent.

More to come

But the margin of the rate-cut came as a surprise to RMB Global Markets, the research division of FirstRand Bank – describing it as “bigger than expected”.

According to the research firm, lower inflation and the need to stimulate economic growth in the non-oil sector have been the major factors behind the central bank’s rate reductions of 750 basis points (bp) to the current 18 percent.

“There is possibly another 200bp left in the cutting cycle. Like the central bank, we are also of the opinion that inflation will fall within the bank’s target in 2018. Moreover, slower private-sector credit expansion continues to dampen economic growth momentum.

“In fact, recent comments by the central bank include the decision to focus on accelerating economic growth and its disappointment in the slow downward pace of lending rates since the cutting cycle commenced,” the research firm noted.

Economist and Senior Lecturer at the University of Cape Coast, Prof. John Gatsi, said until the policy rate cuts reflect in the lending rates of commercial banks, they remain a mere statistic for businesses seeking access to cheap funds.

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Although lending rates have reduced slightly, they have remained largely above 31 percent for commercial banks and as high as 100 percent per annum for microfinance institutions.

Prof. Gatsi told the B&FT in an interview that the central bank must take steps to ensure that the policy rate’s impact on commercial lending rates is felt in the market.

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