The 50 basis-point drop in policy rate announced on November 21, 2016 by the Monetary Policy Committee of Bank of Ghana seem to signal to the market that fundamentals are holding up ready for growth actions. Although a lot more work need to be done to fully strengthen the propellers of economic increase, one would reasonably admit that ours has been an unusually challenging path to navigate despite the range of policy tools at the disposal of steer bearers.
Whereas analysts’ opinion points to a welcomed positive move by BoG, it is important to appreciate that businesses will be hoping for too much should they expect immediate impact on borrowing rate to be felt. First the drop is not significant enough to drive down the cost of funds which has spiraled out of control in recent times. The reason being that what is largely dictating the current market-prevailing rate is liquidity, which remains the single-most-important challenge for players, and the corresponding pass-through competition for available funds. Second, greater constituent of lending rate represent the probability of default of counterparties which is embedded in the fundamental economic risks faced by businesses. And there is little indication that this storm is well behind us.
Historically, the Bank of Ghana has rather demonstrated much more clarity and certainty when the decision to hike rate has had to be made as an austere monetary policy stance. Whilst this would be preferred, same cannot be said when the belt has had to be loosened like in this instance. The last three rate hikes have been aggressive given that the increase had not fallen below 100 basis-points. This time round however, the 50 basis-point decline pulls through open and varied interpretations. Given that the central bank has not relent on its lamentation of the high interest rate regime it is presiding over, the move may be seen as a forced action to taper general market rate. And as a result would want to dispense that gradually and cautiously to gauge market impact.
If the BoG is mimicking the super-cautious exampled approach of the US and UK system, then one would argue that the significant drop in inflation rate (15.8%) seem a one-time event (given the erratic trend since January 2016) that needed further monitoring to establish reasonable sustenance before policy rate altering should have been considered. Nevertheless, respite is found in the fact that the regulator shied away from being aggressive on the drop although some analysts would see the 50 basis-point as still representing an overly optimistic move.
For businesses, solace should be sought in the short-term signal the regulator is sending rather than expectation of immediate relaxing of bank lending rate. This is because banks would hesitate to observe and feel reducing lending risk before pricing in the impact. Comfort is not absent should structural challenges continue to improve to warrant further cut in the policy rate in future announcements. It is until then that banks will potentially begin to be assured of the solidity in economic fundamentals and make relevant move to replicate same by dropping lending rate. Notwithstanding other factors such as market liquidity and NPLs need to also turn favourable for this to happen.
Businesses might need to hold their guns a little longer because the supporting factors to enable favourable lending rate still need much reorganizing in periods ahead. Reality check, the regulator’s move is expected to yield little impact in the attempt to arrest the trending sluggish economic growth at least in the near-term. However, should this be a deliberate gradual approach to eventually drop policy rate to pre-crises level, then businesses are justified in expecting favourable response from banks in the near future.
Author: Ellah Makuba is a Banking Professional