BoG provides stimulus for growth
The Bank of Ghana’s reduction in the benchmark interest rate from 25.5 per cent to 23.5 per cent, signals a stimulus growth and a boost for the private sector, according to financial market players.
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The quantum of the rate cut, which came as a surprise to many, was the biggest by the bank since December 2006 and follows a 50 basis-point reduction in January.
Senior Economist at Databank Financial Services, a non-bank financial institution, Mr Courage Kingsley Martey, said in an interview that the decision to reduce the policy rate was expected, the magnitude of the cut was a pleasant surprise as it turned out more than the 100 basis points reduction that was expected.
“That notwithstanding, it signals a more positive inflation and exchange rate outlook than the financial market had earlier perceived”.
The central bank on March 27 slashed its benchmark interest rate by a two hundred basis points noting that there are signs inflation was trending downwards, a move that may help spur lending and business activity.
"There are indications that growth is likely to remain significantly below potential which, alongside an improved inflation outlook, provides some scope for monetary policy easing," Governor of the Bank of Ghana, Dr Nashiru Issahaku said.
Inflation stood at 13.2 per cent in February, but the government said it was confident it could meet its 2017 end-year inflation target of 11.2 per cent. There was little movement in the cedi against the dollar, which stood at 4.3650.
Banks rate and NPLs
But this is unlikely, however, to lead to a reduction of commercial rates in the short term in part because of a gap that remains between the bank rate and the benchmark 91-day Treasury bill, which stood at 17.5103 per cent.
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This is because an examination of the summary economic and financial data revealed that private sector credit growth of 14.4 per cent for 2016 was sluggish against that of 2015, which was 24.5 per cent.
This was mainly due to high NPL ratio resulting from SOE and energy sector debt while lending rates were extremely high, reinforcing the rising NPLs.
Given that the current government is considered private sector oriented, the policy rate cut is expected to complement fiscal policy in stimulating increased private sector investment and increased productivity.
Ghana was for years one of Africa's fastest-growing economies but growth slumped in 2014 due to falling commodities prices, high inflation, a big budget deficit and public debt. As inflation eases, the bank can lower the cost of borrowing.
Policy tightening
Given the implicit tightening in inflation in the last quarter of 2016, the country is on course to meet its medium-term inflation target of 8±2 per cent by 2018.
According to the Databank analyst, the monetary policy decision seeks to complement government’s fiscal policy in stimulating economic growth.
The drop in the policy rate may not result in a boost in economic activity, if the government does not contain fiscal consolidation that will restore investor confidence.
“There is always the need to complement the fiscal side and the monetary side”, he said in an interview with the Graphic Business.
He said the uncertainties about the direction of fiscal policy in 2017 and higher than targeted fiscal deficit delayed monetary easing, despite the steady path of disinflation. The rate cut is, therefore, seen as an accumulation of delayed monetary easing.
But there are concerns that the domestic and external headwinds could threaten the country’s macroeconomic stability this year.
There are also worries about unstable commodity prices on the international markets that could destabilise the country’s Balance of Payment position and dampen the exchange rate outlook.
Shortfalls in tax revenue mobilisation are also feared could undermine fiscal consolidation and the expected fiscal stimulus in the US and a recovery in the Eurozone can tighten the global financial markets and distort exchange rate stability, BoP and inflation outlook.
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Government is, therefore, expected to take a cue from the cut in the policy rate to target policies that will grow the export base of the country to sustain foreign currency generation.