Wide gap between policy and inflation rates cause of high lending rates—Economist

An Economist at the University of Ghana, Dr. Eric Osei-Assibey, has said that low lending rates should not be expected anytime soon, as the gap between the central bank’s policy rate and inflation rates remain wide – urging the Bank of Ghana to address the challenge.

Following BoG’s decision to maintain the policy rate at 20 percent, Dr. Osei-Assibey told the B&FT that an 820-basis points gap exists between the monetary policy rate and the rate of inflation, which makes it totally impossible for lending rates to come down in the country.

“For me, although the policy rate was maintained, I think the central bank must still find a way of closing the gap between the inflation rate and monetary policy rate. The monetary policy is an indicative rate that the commercial banks use in setting their interest rates, and if the monetary policy rate remains high, there is no way lending rates will go below the monetary policy rate.

“Now, if you look at the spread between the monetary policy and inflation rate it is still very wide, and the central bank must make frantic efforts to try closing that gap; otherwise, we are not going to see average lending rates coming down,” he said

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He added: “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 that means we will record a very sustainable macroeconomic environment so that the monetary policy will come close to the rate of inflation consistently, and that is the only way interest rates can fall”.

The central bank cited inflationary pressures as the main reason it did not clip the policy rate further on Monday.

“While there was a trend decline in headline and core inflation throughout the year – allowing for some 550-basis points policy rate cut – the committee has observed some emerging pressures in underlying inflation in the last two months of 2017, although inflation expectations appear to be well-anchored.

“Under the circumstances, and to ensure that the inflation target horizon is maintained and the medium-term inflation target of 8±2 percent is achieved this year, the committee decided to maintain the monetary policy rate at 20 percent,” Dr. Addison said.

Inflation for December 2017 climbed to 11.8 percent, drifting further away from the end-year inflation target of 11.4 percent. Inflationary pressures were further heightened when the price of petroleum products inched up marginally.

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Dr. Osei-Assibey argues that the disconnect between the policy rate and inflation rate comes as a result of weakness in market fundamentals, largely due to the inflation-targeting regime adopted by the central bank.

“The gap is very wide because of the weakness in market fundamentals. Because of the inflation-targeting regime that we have adopted and the inflationary pressures, the central bank is always afraid to reduce the monetary policy rate because it thinks that is going to be inflationary.

“If inflation is falling, then the monetary policy rate should also be seen falling so that the gap can be closed. But if inflation is falling and policy rate is not falling, then the gap will still be wide. So, the Bank of Ghana must start closing that gap if the lending rates are to come down,” he said.

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