Economic players anticipate prime rate cut

As the Monetary Policy Committee of the Bank of Ghana meets next week to ponder over monetary policy issues, and decide on a new policy rate, economic players are expectant. The policy rate has become a major benchmark in influencing interest rates by banks, and has by far become a barometer of sorts for imaging the economy’s health.

The BoG has not lowered its benchmark policy rate since July 2011, when it brought the rate down by 50 basis points to 12.5 percent. In 2012 the Bank boosted the policy rate by 250 basis points to 15 percent as part of a raft of actions to stem a pernicious slide in the cedi on the foreign exchange market.

Some economic players contend that inflationary expectations have been tamed and therefore a corresponding repositioning of the prime rate will be in the right direction.

“The position of the prime rate more or less reflects the inflationary expectation. I think that in as much as inflation is low, we have not seen the pass-through of the last quarter hump, which also had election-related expenditures,” Mr. Martin Ofori, the Acting Managing Director of First Atlantic Bank, told the B&FT

“But this particular gesture [oversubscription of government bonds] indicates that inflation expectations are downward, and therefore one would be right in anticipating a downward repositioning of the prime rate -- even if it’s by a very small margin,” he said.

“If inflation and interest rates are very high, there is a tendency that those who take loans might not be able to repay, and it will also affect the bank’s bottom line,” Mr. Ofori said.

Mr. Sam Ayininuola, Managing Director of Energy Bank, said now that the fundamentals are looking good and inflation has been tamed, it is appropriate for interest rates to be reviewed downwards -- even if by a small margin.

He said when interest rates are high people who for some reason cannot access loans from banks turn to micro-finance institutions -- where they pay exorbitant interest on loans.

“That is one particular area where, if care is not taken, there may be so much default that has a ripple-effect on the whole banking sector. If that happens, it will bring the confidence in the banking sector down.”

Among measures taken by the BoG to stabilise the cedi last year, was the offering of fat yields on Treasuries and bonds to lure investors to local currency assets and mobilise the excess liquidity that was driving a surge in spending, especially on imports.

Between January-December, the yield on the government’s three-month Treasury-bill rose from under 11 percent to more than 20 percent, drawing investors to the bills but increasing the government’s debt-servicing costs.

Though government has promised an average of 8 percent economic growth per annum between 2013-16 -- with inflation below 10 percent-the International Monetary Fund (IMF) has projected economic growth of 7.8 percent for the country this year.