BoG asked to use moral suasion to compel banks to drop interest rates
A Banking consultant, Nana Otuo Acheampong, has urged the bank of Ghana (BoG) to use moral suasion to compel banks to reduce their interest rates to appreciable levels to reflect the central bank’s key benchmark interest rate, otherwise christened ‘policy rate’.
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According to him, the many other factors, including the cost of funds, contributed to the determination of interest rates by banks, adding that “much as this move by the BoG is laudable, it may not reflect the rates charged by banks immediately”.
Nana Otuo Acheampong, who is also the Chairman of the Ghana banking Awards Planning Board, gave the advice in an interview with the Daily Graphic last Monday when he shed some thoughts on the impact of the new policy rate released by the central bank in Accra.
New rate at 23.5%
The BoG policy rate was dropped heavily by 200 basis points from 25.5 per cent to 23.5 per cent last Monday in a move that has generated some excitement with many business owners expecting a corresponding drop in bank’s interest rates soon.
The reduction in the policy rate, which is the single biggest cut by the central bank since February 2010, is expected to boost lending and business activities.
The Governor of the Bank of Ghana, Dr Nashiru Issahaku, who announced this at a news conference after a Monetary Policy Committee meeting, cited the downward trends in inflation as the major reason for decision.
BoG had argued that the underlying inflation pressures had eased considerably and inflation was projected to trend down towards the medium-term target.
The BoG has a medium-term inflation target of no more than eight per cent, plus or minus two percentage points.
It further noted that there are indications that growth is likely to remain significantly below potential which, alongside an improved inflation outlook, provides some scope for monetary policy easing," he said.
Good signal
“This action by the BoG is a good signal to the public and the business community and the banks must work around the numbers to see how best they can march the new rates” Nana Otuo Acheampong said.
He said the outlook of the economy looked positive and that could be told from the posture of the 2017 budget and government economic policy delivered in the first week of March.
Nana Otuo Acheampong said the fundamental objective of the government as signalled through the budget was to make the private sector work again, and noting that since cost of borrowing was a key driver to ease of doing business, the move by the BoG was one that was simply responding to the prospects ahead.
“The rate is signalling to the private sector and investors that there is something positive that should be valued and worked on,” he said.
Job creation
He said the government had made its intention clear to allow the private sector to create more jobs for the people. Against this background, measures to ensure that cost of doing business is reduced is welcome, hence the excitement around the drop in the policy rate to give a clear signal to the market.
Ghana cedi
Meanwhile, the Ghana cedi has reacted favourably against the major foreign currencies since the announcement of the reduction in the policy rate.
Trading at GH¢4.42 to a dollar as of last Monday morning, the Ghana cedi showed strength as it traded at GH¢4.34 to the dollar last Tuesday. There are expectations that this could drop further to about GH¢4.00 and subsequently to GH¢3.50 by the second half of the year.