The central bank needs to apply its moral suasion instrument to help bring down the rate at which commercial banks in the country lend to businesses, Professor of economics Cletus Dordunoo has said.
Moral Suasion refers to a method used by central banks to persuade or convince commercial banks to advance credit in accordance with directives of the central bank in the country’s economic interest.
Interest rates of commercial banks have remained high – between 28 and 31 percent – despite significant reductions in the policy rate by the Bank of Ghana and drop in inflation.
The Bank of Ghana reduced its monetary policy rate by 100 basis points to 17 percent at its Monetary Policy Committee (MPC) meeting that concluded on May 21, 2018; while in the month before that the BoG also set its maiden Ghana Reference Rate at 16.82 percent.
Prof. Dordunoo, who says it is taking far too long for lending rates to drop despite all indicators pointing in a positive direction, said it is time for the central bank to act.
“It is one of the puzzles. Part of the problem is the inability of prices to respond quickly in the short run, but I think it is time the Bank of Ghana (BoG) used one of its instruments called Moral Suasion so that we can begin seeing some changes in the lending rates. The current rates are too high for businesses,” he said.
Prof. Dordunoo, who is the Chairman of FirstFund – a mutual fund, was speaking at the Fund’s Annual General Meeting in Accra.
In spite of reductions in the key variables which influenced the cost of credit in the last 12 months and beyond, lending rates still hover at between 28 and 31 percent.
Other experts are of the opinion that steps must be taken to bridge the gap between policy rate and inflation before any significant reduction in lending rates can be achieved.
The current gap between the policy rate and inflation rate is 7.2 percent – given that inflation rate as at May 2018 was 9.8 percent and BoG Policy Rate as at May 2018 was 17 percent.
Dr. Eric Osei-Assibey, an Economist at the University of Ghana, told the B&FT in an earlier interview that though the policy rate has seen a significant reduction over the past year, there still exists a wide gap between the monetary policy rate and rate of inflation which makes it totally impossible for lending rates to come
“If you look at other countries, the gap between inflation and the monetary policy rate is very close – but ours is wide. So, frantic efforts need to be made to close that gap – and this means we will record a very sustainable macroeconomic environment so the monetary policy will come close to the rate of inflation consistently. And that is the only way interest rates can fall,” he said.