BoG’s policy rate cut biggest in three years

The policy interest rate of the Bank of Ghana (BoG) has received its largest cut in three years, of 2.0 percentage points, bringing the rate down from 18.0 percent to 16.0 percent.

The latest cut represents the second consecutive time, following the cut in November 2009 when the rate was reduced from 18.5 percent to 18.0 percent.

The policy rate’s new position sends a very strong signal to all households, the business and investment community of the positive economic prospects and eased financial conditions expected for the year, which is anticipated to contribute positively to overall economic activity level s.

Banks’ base and lending rates in particular are expected to ease more speedily in the coming months, especially so when the benchmark 91-day Treasury bill rate is also on the downward trend, currently standing at 17.4 percent (compared to about 25 percent in October 2009).

Average lending rates are now at 32 percent, very much spread apart in comparison to the Treasury bill rate, let alone interest rates of the banks on savings accounts and fixed deposits – which are in the range of 6.0 to 14 percent.

As the lending rates fall, households will be more able to access more credit such as overdrafts, educational finance and credit to meet consumer durables.

Businesses, too, will be more able and willing to borrow for capital investments or to expand their operations. This should generate increased employment and bring about a rise in income levels.

The downward trend in the Treasury bill rate also constitutes a disincentive for the banks to continue investing in Treasury bills. This will free up loanable funds of the banks to give out more credit to the public.

Briefing the media in Accra after its first review in the year, the Monetary Policy Committee of the Bank of Ghana (BoG), Chaired by the Governor of the Bank, Mr. Kwesi Amissah-Arthur, noted that all data point to steady diminishing inflationary pressures.

He said the rate of inflation, which stood at 18 percent in October 2009, declined to 16.9 percent in November and then to 15.9 percent in December 2009.

He indicated that the further decline in inflation, to 14.8 percent in January 2010, anchors the BoG’s forecast that the inflation rate would fall further to a target range of 7.50 to 11.5 percent by the end of the year.

The Governor’s main optimism about the broad outlook on inflation stems from the favourable trend in the food component of inflation, compared to a year ago.

The latest assessment done by Ghana Statistical Service shows that the food component of inflation has fallen from about 40 percent a year ago to 18 percent currently, attesting to the relatively effective policies of government in addressing the problems with food supply across the country.

Barring any negative developments in world crude oil prices and utilities, the Governor said government’s revenue and spending plan, as well as external sector prospects, stand to provide positive support for the macroeconomic conditions of 2010.

He indicated that the overall revenue and expenditure gap realised in 2009, which was a narrow cash deficit of GH¢1.1 billion, translating into 5.2 percent of gross domestic product (GDP), compared with a deficit of GH¢2.5 billion representing 14.0 percent of GDP, is already engendering positive support for expected macroeconomic conditions.

“The improvement of the fiscal situation has resulted in a reduction in the public sector borrowing requirement (PSBR), which has contributed to the reduction in Treasury bill rates,” the Governor explained.

“The market has also witnessed a shift towards long-dated instruments, in line with easing inflation expectations. The share of the short-dated securities in the outstanding stock of government securities fell to 56.7 percent in January 2010, after rising consistently and peaking at 66.2 in August 2009,” he added.

On the external front, total merchandise exports rose marginally in 2009 to US$5.8 billion from US$5.3 billion in 2008. Merchandise imports on the other hand declined 21.6 percent from US$10.3 billion in 2008 to US$8.0 billion.

Combined with the Capital and Financial Account which registered a surplus of US$2.8 billion, Ghana’s overall balance of payments registered a surplus of US$1.2 billion in 2009 compared with a deficit of US$904.8 million in 2008.

Gross international reserves also grew, extending cover for the importation of goods and services. The reserves grew from US$2billion, the equivalent of two months cover for imports at the end of 2008, to US$3.2 billion, the equivalent of three months cover for imports.

The favourable external environment continues to support the stability in the foreign exchange market, arresting inflationary tendencies that are due to currency depreciation.

In year-on-year terms as measured to end-December 2009, the cedi recorded depreciations of 14.8%, 22.4% and 16.2% against the US dollar, the pound sterling and the euro respectively. By the end of January 2010, the year-on-year depreciations had slowed to 10.25, 20.7% and 15.6% against the respective major trading partners.

Concluding his report, the Governor noted that the outlook generally points to low risks for the economy and it is the expectation that banks in particular would respond accordingly by bringing down lending rates, which would allow for a restoration of credit growth and ensure steady growth in output.

source :B&FT