BoG cuts Policy rate to 15%

The Bank of Ghana has reduced its policy rate by 100 basis points to 15 percent with the hope that businesses can now borrow more at competitive rates to boost economic activities in the country, the Governor of BoG said on Friday.

The reduction in the policy rate follows an earlier aggressive measure taken by the Central Bank to trim the rate by 200 basis points at the last Monetary Policy Committee (MPC) rate-setting meeting in February this year.

The BoG Governor, Kwesi Bekoe Amissah-Arthur, in presenting the outcome of the MPC meeting to assess the health of the economy, explained that the further reduction in policy rate was aimed at encouraging banks to lower their lending rates to businesses as the economy shows signs of slowdown.

Data from the Central Bank’s Composite Index of Economic Activity, which is used to gauge the pulse of the economy, declined during the first two months of the year - implying a slowdown in the pace of economic activity.

In real terms, the Index declined by 11.7 percent in the first two months of the year.

“The latest in the periodic surveys carried out by the BoG to gauge the sentiments of businesses and consumers gave mixed results.

“While consumers remained confident about the prospects of the economy, businesses were less confident. The overall business confidence index dropped 3.5 points in the latest survey,” he said.

He added that the high lending rates in the country have affected business confidence.

The reaction of banks to the last Central Bank’s policy rate cut in February has been passive, making it very expensive for businesses to borrow to finance their operations.

The Governor said discussions that the central bank have had with the banks revealed that banks pegged their lending rates against the going money market rates, and not the BoG policy rate.

“The banks argue that the source of deposit is related to money market rate and not the policy rate, and that is why their interest rates are still high even though the policy rate has been coming down.

“But the Treasury bill rate is coming down, so lets wait for the next two months to test the argument of the banks,” he said.

Between December last year and mid-April this year, the benchmark 91-day Treasury bill rate went down by 8.7 percentage points to 13.9 percent. Similarly, the 182-day Treasury bill rate declined by 11 percentage points to 14.4 percent.

In reacting to the recent Central Bank policy cut, the Head of Research for Standard Chartered Africa, Razia Khan, told Reuters News Agency that the reduction of the BoG prime rate falls in line with their expectations, adding:

"The Bank of Ghana rate-cut is in line with our expectation. Continued year-on-year disinflation has allowed the room for easing; but with new risks on the horizon in the form of higher oil prices and a less marked cedi appreciation trend, the Bank of Ghana is correct to adopt a more cautious pace of easing.

“Nonetheless, while the opportunity exists, we expect further rate cuts. At least another 100 basis points in June looks increasingly like a done deal. Whether we see anything beyond that will depend on the oil price, cedi stability and other inflationary pressure."

On his part, Ridle Markus of ABSA CAPITAL said: "This was as we expected, as inflation has been coming down rapidly and the outlook remains very favourable. We expect another 100 basis points in June.

"The interest rate decision is in line with our expectations ... This outcome is consistent with the ongoing pro-growth shift in Ghana's policy framework, even as lending rates have remained relatively sticky until now amid a weak monetary transmission mechanism and the intrinsic risk-profile associated with lending-related activities.

"The Bank of Ghana recently said consumer prices would be in single-digits by year-end, but we are more bullish on the downward path of inflation in light of the recent CPI dynamics - in addition to exchange rate stabilisation, fiscal consolidation and a contained impact of higher oil prices as of 1Q 2010," added Samir Gadio, Rencap Securities.

source:B&FT