Prime rate removes distortions In borrowing, lending rates

THE Bank of Ghana (BoG) has said that the introduction of the prime rate has removed distortions in the various lending and borrowing rates of banks. The First Deputy Governor of BoG, Mr Emmanuel Asiedu-Mante, said this in an interview in reaction to assertions by Dr Augustine Fritz Gockel, a lecturer at the Department of Economics, University of Ghana, that the introduction of the prime rate is a contributory factor in keeping interest rates high.

The BoG prime rate is the rate at which the Central Bank provides overnight funds to banks and thus influences the interbank market rate and interest rates.The Deputy Governor said prior to its introduction, movements in interest rates were not market-oriented and did not conform to the direction of monetary policy.

“The prime rate was therefore introduced to tighten the link with liquidity management and inflationary expectations and the transmission of monetary policy actions”, Mr Asiedu-Mante observed.

He said the Monetary Policy Committee (MPC) after consideration of economic developments and exhaustive deliberations takes its rate decision on the basis of its assessments of economic developments and their implications for inflation and exchange rate movements.

“The tight monetary policy of the BoG has been responsible to a large degree for the declining inflation being witnessed”, he stressed.Mr Asiedu-Mante said that a premature loosening of the monetary policy will result in an inflationary spiral and very high nominal interest rates.

He cited the year 2000, for instance, when nominal interest rate reached 40 per cent and the bank rate was 27.0 per cent, which, he said, was irrelevant for monetary policy. He stressed that “it was distortionary” adding that the prime rate on the other hand provides a good signal of the BoG’s assessment of monetary conditions.

The deputy governor said that in November last year, reasons cited for keeping the prime rate unchanged despite some positive developments included the threat of higher oil prices, given the situation in the Middle East, increase in monetary growth and increased net domestic financing of government.

He assured players in the financial sector that BoG will not hesitate to review the prime rate if conditions prevailing in the domestic as well as on the international scene are favourable. Mr Asiedu-Mante said the BoG will continue to pursue the objective of low and stable inflation stressing that “the ultimate objective is to bring interest rates, both nominal and real, down and provide impetus for private sector-led growth.