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There’s room for policy rate reduction – AGI

By: Maxwell Akalaare Adombila
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Dr Adu Gyamfi - President of AGI
Dr Adu Gyamfi - President of AGI

THE Association of Ghana Industries (AGI) has commended the Bank of Ghana (BoG) for helping to stabilise the economy with the right mix of monetary policy tools, but says the decision to stay the policy rate at 20 per cent could delay the fruits of that stability to businesses.

With Treasury bill rates at record low, inflation down to 11.8 per cent and the cedi holding its own against benchmark currencies, the AGI said the BoG “could have been a little more ambitious” in the setting and announcing of the policy rate for the first quarter of the year.

The Chief Executive Officer of the association, Mr Seth Twum-Akwaboah, told the Daily Graphic on January 23 that a reduction in the policy rate would have inspired the private sector to borrow more funds for investment and growth.

“If there are all these positives (macroeconomic stability), then why do you maintain the rate?” he asked.

“Perhaps, BoG could have been a little more ambitious by reducing it a little bit, especially at the beginning of the year, when you want to push private sector to deliver,” he stated.

Reason for decision
Mr Twum-Akwaboah was commenting on the decision of BoG’s Monetary Policy Committee (MPC) to maintain the bank’s benchmark rate at 20 per cent.

The Central Bank Governor, Dr Ernest Addison, explained on January 22 that the decision was “to ensure that the inflation target horizon is maintained and the medium-term inflation target of 8±2 per cent is achieved this year”.

“While there was a trend decline in headline and core inflation throughout the year, allowing for some 550 basis points policy rate cut, the committee has observed some emerging pressures in underlying inflation in the last two months of 2017, although inflation expectations appear to be well anchored,” he explained.

Borrowed funds
Since January 2017, the BoG has lowered the policy, a benchmark rate to banks, by 550 basis points, ostensibly to signal a moderation in inflation and lending rates. 

Its latest decision now means that the interbank lending rate will remain below 20 per cent. It also means that BoG’s lending to banks, under the lender of last resort, will remain at 20 per cent, something AGI’s CEO said could have been lower.

“The policy rate, to a large extent, determines the interest rate of loans. Now that the government has made it clear that it wants the private sector to be the lead in creating the jobs and other programmes and the private sector also relies heavily on money borrowed from the financial institutions, it is natural to say that the lower the interest rate, the better for us.

“And at the beginning of the year like this, if you have the rate reduced, it means that you are reducing cost of borrowing and you are actually encouraging private sector investment,” Mr Twum-Akwaboah said. 

Impact on lending rates
On an annual basis, cost of and access to credit have featured among the top four challenges facing businesses in the country.

Mr Twum-Akwaboah stated: “Nothing much has changed,” as banks fail to rapidly transmit the stability in the economy and the drastic drop in the policy rate into the cost of borrowing.

After opening last year at 26.9 per cent, BoG’s annual percentage rate, which tracks the rates banks and non-bank financial institutions charge on loans, softened to 25.7 per cent in December. This represents a 100 basis points drop compared to the 550 basis points drop in the policy rate.

AGI’s CEO said trend in the interest rates market was disproportionate to the stability.

“Now, we are talking about plus 25 per cent. That is still too high, considering the economic achievements we have made in the recent past,” he said and, thus, urged banks to respond accordingly.

He noted that the association would continue to dialogue with the central bank with the aim of ensuring that businesses benefited fully from its policy decisions.