BoG eases credit tightening; But banks may not respond — Analyst

The Bank of Ghana (BoG) seems to have heeded calls by the business community for a reduction in the lending rate by reducing its policy rate to bolster growth and push the commercial banks to also reduce their rates.

The central bank has cut its benchmark policy rate by a 100 basis points from 21 per cent to 20 per cent due to a reduction in consumer inflation and potential economic growth.

But commercial banks, whose interest rates have averaged between 29.1 and 31.2 per cent from October, may not respond to this cut because of the high credit risk in the private sector, analysts have warned.

Speaking at a news conference in Accra on Monday, Central Bank Governor, Dr Ernest Addison, said the reduction was influenced by a favourable economic outlook and a reduction in inflation expectations.

“The indicators of economic activity, business and consumer confidence remain strong and inflation conditions remain subdued,” Dr Addison said.

This is the first time since September 2014 that the policy rate has hit the 20 per cent mark and the first time since January 2017 that the BoG has dropped the rate by 100 basis points.

The reduction in the policy rate by the BoG may also be an answer to calls by the Ghana Chamber of Commerce and Industry for a reduction in interest rates to boost credit to the private sector.

This means that since March this year, the policy rate has been lowered by 550 basis points, while inflation has slowed from a peak of 19.2 per cent in March 2016 to 11.6 per cent in October this year.

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Chamber Awards

At its awards ceremony in Accra last Saturday, the Ghana National Chamber of Commerce and Industry, the Private Enterprise Foundation and the Association of Ghana Industries appealed to commercial banks to reduce their lending rates to help private sector businesses access cheaper sources of funds to expand their businesses.

Why banks may not respond

But a senior economist at Databank, Mr Courage Kingsley Martey, said a key rationale for the seeming inability of commercial banks to lower their lending rates in tandem with the policy rate had its root in the high credit risk prevalent among private sector businesses.

In the light of the sluggish growth rate in the non-oil sector, commercial banks would continue to perceive limit scope for loan repayment by prospective borrowers. Already, the commercial banks are burdened with 21.6 per cent of their loan portfolios being at risk of not being paid back. This situation poses a significant threat to banks' capital and profitability, as they continue to allocate more resources to cover this risk of default.

“Naturally, the rational bank would, therefore, remain cautious in lending to the private sector even in the face of continued monetary easing by the central bank,” he said in an email.

Mr Martey recalled the high cost of operation faced by the banks, together with expensive deposit mobilised during the period of elevated interest rates, all of which required high interest earnings to support.

Consequently, one would expect that a combination of declining NPLs, easing operating expenses and cheaper deposit mix would be necessary to trigger a reduction in the average lending rates for the banking sector.

In the midst of these also is the need to sustain and institutionalise low inflation and a stable Ghana cedi in order to lower the lending rates environment in the country.

Growth forecast

The Finance Minister, Mr Ken Ofori-Atta, had raised the country’s 2017 growth forecast to 7.9 per cent from 6.3 per cent on expected oil production, and 2018 growth is seen at 6.8, marking a turnaround for an economy that in the previous three years has averaged less than four per cent.

The governor, however, indicated that favourable external conditions could impact positively on the domestic economy through financing and trade channels.

The country is currently under an IMF loan programme to reduce its fiscal deficit and public debt and stabilise the volatile local currency.

Analysts have cautioned that while the inflation rate is at the lowest in more than four years, a weaker cedi, which has lost 11 per cent this year, is a threat to the price outlook.

But the governor said price developments during the first 10 months of the year continued to show signs of dampening inflation expectations.

Consumer price index

Headline inflation, measured by the consumer price index, was 11.6 per cent for October 2017, a reflection of a steady decline in inflation since the beginning of the year, except for April and August when inflation ticked up slightly.

“All the bank’s indices of core inflation continued to decline in October, pointing to a downward trend in underlying inflation, well within or close to the end year inflation target,” he noted.