Ghanaian businesses not likely to benefit from policy rate cut – Analyst

Bank of Ghana

The Bank of Ghana cut its benchmark lending rate by 200 basis points from 18% to 16% Friday February 19, 2010. It is the second time in three years that the central bank has done so. But the country’s expectant business sector won’t benefit from the cut anytime soon, an analyst has said.

There are expectations of further cut in the interest rate if inflation continues to decline.

Ghana’s inflation has been declining. Inflation stood at 20.53% in March 2009 and it went up to 20.56% in April 2009. The rate of inflation increased for six consecutive months from November 2008 to April 2009, driven primarily by the non-food group, such as hotels, restaurants and cafes.

But in January 2010 inflation fell to 14.8% from 16% in December 2009 which was the seventh consecutive time raising expectations for a cut in lending rates, particularly from small businesses.

Speaking to soon after the announcement of the cut, Sampson Akligoh, Senior Analyst at Databank Ghana said “the development is an interesting one as we all know the private sector has been calling for a cut for sometime now, because even for Ghana, our interest rate is one of the highest in Africa.”

But his concern is that “industries will not benefit immediately because there is market failure,” he said, adding that “the transmission mechanisms do not work and so we won’t see decline in lending rates of the commercial banks in line with the cut by the central bank.”

He said now that the prime rate is down and there is a reduction in treasury rates, the banks should reduce their lending rates, but that is not likely to happen anytime soon.

Mr. Akligoh acknowledged that the central bank is making efforts to remove the bottlenecks.

“We have a different situation now, we have treasury bills declining, the prime rate coming down and inflation declining. When you combine all these you should see some reinforcement for lending rates to come down,” he said.

He said industry is happy and would like to see further cut in the interest rate. However, he warned that “we must be careful not to push the economy to real negative interest rate regime because that also has implications for the expectations of foreign investors who look at our medium to long term debts and the pressure on the domestic auction market.”

In another development, the Managing Director of Fidelity Bank Ghana, Mr. Edward Effah speaking at a Fidelity Bank/GJA Soiree in Accra Friday February 19, 2010, said commercial banks cannot cut their lending rates immediately in line with the cut in the prime rate, because their lenders will expect to be paid previous interest rates on their deposits.

He however said, interest rates offered by commercial banks will go down in about six months time following the cut in the central bank’s lending rate.

By Emmanuel K. Dogbevi

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