Don’t expect banks to cut interest rates with BoG policy rate cut

Prof. Gordfred Bokpin

Two analysts have applauded the Bank of Ghana for recording the biggest drop in the policy rate in nearly 10 years, a move intended to encourage banks to reduce interest rates.

Professor Godfred Bokpin from the University of Ghana and  Chief Operating Officer of Dalex Finance Joe Jackson, however, say banks are hesitant to respond to the move by cutting the cost of borrowing which goes as high as 30% in some banks.

The Bank of Ghana through its Monetary Policy Committee (MPC) announced last Monday, it was dropping the policy rate by 200 base points. It means the rate has been reduced from 25.3 to 23.5 %.

Analysts say the BoG usually maintains the policy rates and makes only minute reductions of sometimes under 0.5%.

The policy rate is linked to inflation and recent drops in inflation rates have caused the Bank to follow the lead by cutting the monetary policy rate.

Headline inflation declined for the fifth consecutive month in February 2017. Inflation fell from 17.2 percent in September 2016 to 15.4 percent in December and further down to 13.2 percent in February 2017.

A year ago at the same time, inflation was 18.5 % in February 2016.

Prof. Bokpin explained on Joy FM’s Super Morning Show Tuesday, the Central Bank could not reduce the fiscal rate as significantly as it has done now because government was not disciplined in managing its fiscal policy.

“What has eluded the Central Bank all this while is fiscal discipline,” he said. 

He said he had expected the drop in interest rate much earlier because of signals and improvements in the fiscal direction of the NPP government.

Joe Jackson also described the drop in the policy rate as ‘a lot in the context of the central bank’. ‘It is definitely a good thing’, he noted.

But the two analysts stressed that banks would need more than just a drop in policy rate to also drop interest rates.

“It is early days yet,” Prof. Bopkin noted. He said banks may be hesitant in taking a cue from the BoG because operational cost in the sector is still high.

There is the question of reliable power supply and the cost of power, he said. The banks may want to pass on the additional cost incurred on generators to the consumer by keeping a high-interest rate, he explained.

The COO of Dalex Finance also believes that policy rate drop is a sign of “good things ahead” but “it won’t change much”.

He expressed concern about the depreciation of the cedi and noted that banks would want to maintain their interest rates because they could lose money if the cedi begins to slide again against the dollar.

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