IEA says the Bank of Ghana is likely to maintain Monetary Policy Rate at 14.5%

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The Institute of Economic Affairs (IEA), is projecting an unchanged policy rate of 14.5% by the Bank of Ghana.

The Monetary Policy Committee of the Central Bank is presently holding its 104th Monetary Policy Committee meeting to review developments in the economy.

Speaking during a roundtable meeting on “Making Monetary Policy in Ghana More Fit-For-Purpose” in Accra, the Director of Research at the IEA, Dr. John Kwakye, attributed the Institute’s projection to the fact that the 100 basis points increase in the rate in November 2021 is yet to fully impact on the economy

“Our judgement is that the inflation risk outweighs the growth risk. On that score, the Policy Rate should, in principle, be adjusted upwards. However, recalling that the MPC increased the Policy Rate by 100 basis points just two months ago at its November meeting, the likelihood of another follow-up increase may be low since the last hike needs time to work itself through the system. Also, importantly, such a decision would appear to be counter to what the Committee has touted as a successful enduring process of disinflation and the lowering of interest rates in recent times.”

“Given these contending issues, our expectation is that the MPC will try and play it safe by holding the PR at its current level of 14.5%. This should allow the Committee to buy a little bit of time until its next meeting in March when a few more inflation readings would have made the situation clearer on how to position the Policy Rate,” he said.

The Monetary Policy Rate is the rate at which the central bank lends to commercial banks, and is also used by commercial banks to calculate their base rates.

In January 2020, the Monetary Policy Committee of the Bank of Ghana voted to maintain the policy rate at 16% for the sixth consecutive time since 2019.

In March 2020, the Monetary Policy Committee of the Bank of Ghana reduced the policy rate to 14.5%. The rate was maintained at 14.5% from May 2020 through to March 2021, following the impact of COVID-19 on the
economy.

However, in May 2021, the Monetary Policy Committee at its 100th meeting for the first time since March 2020, reduced the policy rate to 13.5% after it was kept unchanged at 14.5 percent for six consecutive times.

The decision, according to the Governor of the Central Bank, Dr. Ernest Addison, was informed by the improvement in macroeconomic conditions on the global front and the local front.

Dr. John Kwakye also charged the Bank of Ghana and the Government to put in place urgent measures to address the issue of the high cost of lending in the country.

“Lending rates have been out of control in Ghana for years. This is the result of a multiplicity of factors, including persistent inflation; high cost of monetary policy; banks’ inefficiencies and high operational costs; high borrower risks; government incessant borrowing; and high bank taxes. The persistence of high lending rates has had a negative effect on investment, growth, and employment. Given the multiplicity of causes, monetary policy alone cannot resolve the problem. The solution must come from multiple relevant fronts,” he said.

He, however, urged banks to improve their operational efficiency and reduce their costs to a minimum, so that these do not feed into lending
rates.

“BoG has a duty in ensuring a more effective way of controlling inflation so that monetary policy itself does not fuel lending rates. BoG must strengthen safety nets for borrowers, including through identification and credit worthiness schemes. BoG must ensure strong oversight of the banking industry to engender efficiency and high standard of operation and to prevent collusive and “customer capture” practices that tend to sustain high lending rates and other financial charges”, he added.