Analysts have been expressing varied views on the 50-basis points reduction in the policy rate, with some saying it probably would not coax the banks into interest rate cuts in the short term, at least.
After holding the policy rate at 26 percent for about a year, the central bank, yesterday, announced it had eased its tightening of the monetary policy rate to 25.5percent.
Jeffery Ken Baiden, Chief Investment Officer at Nimed Capital, an investment bank, noted that while the BoG should be lauded for the decline in policy rate in an attempt to spur economic activity, “we anticipate an uncorrelated action from the banking community in the short run.”
He explained that the BoG should have been guided by the long historical economic architecture of the Ghanaian economy, which often sees the fourth quarter registering increased inflationary pressure and currency depreciation.
“These recurrent economic behaviours will constrain the banks from reducing their base rate in reaction to the policy rate decision, hence the positive impact of the policy may be delayed,” he said.
Sampson Akligoh, Managing Director of InvestCorp, an investment bank, said “commercial bank rates may decline but not immediately as cost of funds often decline very gradually.”
Another economist who pleaded anonymity said: “In my view, it would have been better for the MPC to not give this policy-relaxation cue to the markets when the economic outlook for the remaining period of the year is plagued by electorally-induced uncertainty.”
The rate cut is the first since 2011, when monetary policy rate began a gradual ascent, moving from 12.5 percent to peak at 26 percent.
Also, this is the first time in more than a decade that the policy rate has been cut just before elections; the committee maintained the rate at 18.50percent in 2004; 17percent in 2008; and 15percent in 2012, all before the polls.
With the currency maintaining stability throughout the year and inflation seeing a drop, business leaders have been calling on the Central Bank to ease its hold on the policy rate, a critical indicator of interest rates.
With the government missing its fiscal deficit target of 3.9percent to hit 5.9percent, the analyst added that the fiscal situation is showing a deviation from the targeted consolidation path and that fact should have been given more weight in the MPC’s considerations.
“I don’t expect the rate-cut to make any difference to weakening economic growth, which is the effect the MPC is hoping this decision would have. On the contrary, there’s a good chance this could end up being seen later on as a misstep,” the economist opined.
The Bank of Ghana has said the higher than programmed deficit was mainly due to lower revenues arising from significant shortfalls in oil revenues, while expenditures were broadly on track.
Governor of the Central Bank, Dr. Abdul-Nashiru Issahaku, told the press after the 73rd regular MPC meeting that the rate cut was necessitated by an improvement in the inflation outlook which fell from 17.2 percent in September to 15.8 percent in October.
“Inflation outlook remains positive. Barring any major price shocks, the forecast remains broadly unchanged and inflation is expected to return to the medium-term target band in 2017. The current tight policy stance and exchange rate stability should further support the disinflation process,” he added.
Justifying the bank’s reasons for cutting the rate, the governor said the improvement in the inflation outlook was further aided by a relatively stable local currency, which had depreciated against the dollar by about 4.6 percent year-to-date.
Jeffery Ken Baiden of Nimed Capital, however, argues that: “the cedi may experience further marginal depreciation and the trend will continue to prevail into the first quarter of 2017,” whiles the increasing expenditures or spending during election and Christmas may not sustain the drop-in inflation.
But Sampson Akligoh noted that although the rate cut signals confidence for continuous macro stability owing to developments during this quarter, “this optimism will be more entrenched after the elections.”