Policy rate cut could disturb banks – Economist

Despite inflation falling to single-digit in April, a first in five years, an economist at the University of Ghana, Dr. Lord Mensah, has said that the Monetary Policy Committee (MPC) may not further reduce the policy rate – given that banks have not yet adjusted to the newly-introduced reference rate model.

The Bank of Ghana (BoG), in consultation with the Ghana Association of Bankers, reconstituted a Working Group to review the existing base rate model and develop a new framework for base rate determination.

According to the BoG, the objective of the review is to, among other things, fulfil its commitment to move toward a more market-based model of base rate setting in the medium- to long-term.

The reference rate, currently at 16.8 percent, now replaces the minimum lending rate for all banks as was the case with the previous model.

It is against this background that Dr. Mensah maintains that the MPC will keep the policy rate at 18 percent in order to give banks time to adjust and adapt to the new model.

“I am expecting the committee to maintain the policy rate, because if you look at the dynamics of the happenings around—inflation is coming down alright—but the regulator just introduced a new reference rate that is more market-oriented.

“And within the reference rate itself we have the monetary policy rate…they have to ensure that the banks will adapt to it before they react by changing the monetary policy rate. So, if you ask me, I am expecting the central bank to maintain the rate,” he told B&FT in an interview.

Any reduction, he argued, could destabilise the banking industry as banks are still readjusting their systems to apply the current model.

“The banks have not settled on the reference rate yet, so any reduction of the policy rate will mean that the reference rate will reduce as well. So, with these hitches here and there, I am expecting that the central bank will maintain the monetary policy rate for the banks to understand and adapt – and also to restructure their systems for the current formula.

“So, I think if the policy rate is further reduced it will destabilise the systems of the banks, because most of them are now restructuring their loan pricing and all that,” he said.

Inflation for April dropped to 9.6 percent from the 10.4 percent recorded in March 2018, giving the central bank further reason to reduce the policy rate if it wants to do so later today – as it cited ease in inflation pressures as the reason it reduced the rate from 20 percent to 18 percent in March.

“The disinflation process continued to firm-up over the first two months of the year, with significant moderation in price pressures. Both headline and core inflation broadly trended down, alongside easing inflation expectations – an indication that the disinflation process remains well-anchored,” said BoG Governor, Dr. Ernest Addison.

“The Committee noted 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. Under these circumstances, the Committee decided to reduce the monetary policy rate by 200 basis points to 18 percent,” he added.