…as conditions make it difficult for cut in policy rate
The private sector must tighten its belt for a long-haul fight in the quest to see lending rates decline to affordable levels, as current macroeconomic conditions do not make it likely to see the Bank of Ghana cut its policy rate anytime soon.
Average lending rates of commercial banks continue to remain high at more than 20 percent, a situation that has turned into a blame-game among banks, the Bank of Ghana and government itself, with each blaming the other.
In the private sector’s eyes, banks are just profiteering from their customers by slapping high interest rates on loans. The banks also say lending rates are high due to the policy rate and risk factors in lending to the private sector. And the Bank of Ghana feels government’s continuous borrowing at attractive interest rates from the banks is the main cause of the high cost of lending to businesses.
As the Monetary Policy Committee ends its meeting to decide the next policy rate today, the private sector would wish that the rate is cut to enable banks to also bring lending rates down. However, such hopes remain untenable for now. Why?
At present, inflation – which is the main determinant of policy rate direction – has shot up to abnormal levels; climbing above the upper-ceiling limit of 10 percent targetted by the central bank. Inflation recorded 12.5 percent at the end of last year – the highest increase in prices for 29 months, since rebasing the basket was effected in August 2019.
The cedi has also not been in good shape recently, as it depreciated by 4 percent at the end of last year against the US dollar. Then the almighty public debt also keeps mounting, triggering some reactions from bond investors – thereby putting further pressure on the local currency.
Besides challenges on the domestic front, global conditions have also not been favourable. Supply chain disturbances still exist, energy prices are rising, and several other challenges are impacting negatively on the local economy.
All these challenges would ideally call for another hike in the policy rate. But to ease pressure in the system, the Monetary Policy Committee may have to settle for maintaining the rate for now to avoid further agitation from the private sector – which has consistently expressed worry and frustration over the high lending rates.
This is underscored by the Director of the Institute of Statistical, Social and Economic Research (ISSER) at the University of Ghana, Professor Peter Quartey, who in an interview with the B&FT said he expects the Committee to keep the rate at the current 14.5 percent, considering government’s policy of creating a favourable atmosphere for the private sector.
“I would inch toward maintaining the policy rate, at least for this time. Looking at the fundamentals, inflation expectation is still on the rise and there is some level of exchange rate depreciation, among others. And if you juxtapose these against government’s policy of ensuring lower cost of doing business, then increasing the rate might work against that policy of private sector development. So, it should be maintained this time; and if the current trends are not favourable it can be increased in the future,” he said.
In fact, the Committee stated in its last report that there was an elevated risk to inflation, requiring prompt action to be taken; hence its decision to hike the policy rate by 100 basis points to 14.5 percent. With such risks still existing, and even getting worse, it would be shocking for the Committee to cut the policy rate – as this would further trigger capital flight by foreign investors: a situation that wouldn’t bode well for the economy at present.
So, to sort of satisfy each stakeholder to a point, the Committee will likely maintain the policy rate at the current 14.5 percent; denting hopes of affordable lending rates for businesses.
