18% policy rate still not ideal for borrowers – BoG

Individuals and businesses who want to take advantage of the reduced policy rate and borrow from commercial banks with the hope of getting reduced interest rates and scheduled launch of the Ghana reference rate next week, would have to reconsider their thoughts.

These two developments, according to the Bank of Ghana, BoG will still not solve the underlying cause of the high cost associated with the provision of banking services in the country.

“The underlying cause of high lending rate is the cost of banking. So there is the need for the banks to be more efficient to reduce the cost associated with the provision of banking service. And there is also the importance of the economies of scale in being able to help banks have lower lending rate”, the governor Dr. Addison told the media in Accra.

The central bank has reduced the rate which is the rate at which it lends money to banks for onward lending to the public by 200 basis points from 20 percent to 18 percent, the lowest in the last three years.

The Monetary Policy Committee cited the positive growth prospects for 2018 which is to be supported by crude oil production, gradual recovery in the nonoil sector, and favourable business and consumer sentiments as the reason for the reduction.

“Both headline and core inflation broadly trended down, alongside easing inflation expectations, an indication that the disinflation process remains well-anchored. Our latest forecast suggests that the medium-term inflation target of 8±2 percent is within the forecast horizon and we are on course to meeting the inflation target band,” the committee stated.

It noted further that the current inflation forecast provides scope for monetary policy to realign interest rates, translate the disinflation gains achieved so far to the market, and reinforce the fiscal consolidation process by easing the burden of interest payments on the budget.

Meanwhile the BoG and the Association of Bankers will next week begin the publication of a reference rate which is a module aimed at making the banks agree on a benchmark of rates, including the 91 day bill rate, the interbank market rate and the monetary policy rate on the basis of some weight.

“The plan is to start what is called the Ghana reference rate in the first week of April.  That will bring a lot of transparency in the system in the setting of interest rates. But it will not move us from focusing on the underlying reasons why lending rates are so high,” Addison said.

By Nana Oye Ankrah