The Governor of the Bank of Ghana, Mr Paa Kwesi Amissah-Arthur, who announced the decision of the Monetary Policy Committee (MPC) of the bank in Accra last Friday, said although inflation was coming down, there were risks to demand pressures being fuelled by higher than anticipated government spending.
He said the view of the MPC was that the decline in inflation over the past 12 months may continue into October 2010 and further into 2011, although at a slower pace anchored on lower food prices and a stable exchange rate.
“These initial conditions are expected to help contribute favourably in ensuring that inflation stays within target.
While acknowledging that inflation will ease over the horizon, there are some elements of risks and uncertainties that could impact on the scenario,” he said.
However, Mr Amissah-Arthur pointed out that the risks were underpinned by renewed wage pressures from the public sector and its impact on government expenditures and advised that “these demands would have to be moderated and managed to ensure that the fiscal programme remains within acceptable targets”.
The governor, however, expressed worry that commercial banks were not reducing their interest rates as fast as cuts in the policy rate and Treasury Bill rate.
The governor told reporters at the 41st meeting of the MPC that the new excuse by commercial banks that a slash in the Policy Rate, the rate at which the central bank may lend to commercial banks, did not matter as much as a reduction in treasury bills was invalid.
He explained that in each scenario, the rates had fallen faster than reductions the banks had effected in response to significant cuts in the policy rate over the last 10 months.
The Bank of Ghana reduced its policy rate from 18.5 per cent at the end of 2008 to 13.5 per cent, but the lending rates of banks did not fall that fast.
Treasury Bill rates, which signify the extent of government borrowing, have also reduced from the region of over 28 per cent in January 2009 to the current rate of 12.4 per cent, with the government gradually settling arrears owed the private sector, particularly contractors.
Some of the banks have argued that the policy rate was not a better benchmark as against the Treasury bill rate, which they actually compete with for deposits.
They argue that banks do not really borrow from the central bank, thus making the policy rate a not-too-important interest rate guide.
But the governor said the issue of commercial banks not borrowing from their lender of last resort – the central bank – was a worldwide issue as banks reckoned that borrowing from the central bank could be misconstrued as being weak and rather borrow within themselves overnight.
On the whole, the governor said interest rates had declined over the last quarter, with choices shifting towards long term instruments, such as the two and three year fixed rate notes.
“Between June and August 2010, the 91-day Treasury bill rate declined from 12.9 per cent to 12.7 per cent. The 182-day Treasury bill rate also declined from 13.4 per cent to 13.1 per cent.
The rate on the 1-year note fell from 13.8 per cent to 13.4 per cent. That for the 2-year fixed rate note also dropped from 13.9 per cent to 13.4 per cent,” the governor, who is also the chairman of the MPC stated.
The average base and lending rates of deposit money banks saw some declines over the period under review, while the average base rate of the banks declined by 153 basis points to 27.1 per cent, while average lending rates declined by 213 basis points to 28.5 per cent over the same period.
With the average deposit rates of the banks reducing from 9.5 per cent in June to 8.9 per cent in August, it means that commercial banks’ spreads, which is the difference between the average lending rates and the average deposit rate, narrowed by 1.2 percentage points.
But the banking sector continued to be strong and well-capitalised, with total assets of the industry growing by 7.8 per cent from GH¢14 billion at the end of December 2009 to GH¢15.1 billion by the end of July 2010.
However, non performing loans (NPL), which shows the quality of loans given out by the commercial banks, continue to pose a challenge to the bankng industry, although the ratio improved slightly.
“The commercial banks loan portfolio quality, defined as the ratio of loan losses to gross advances showed a marginal improvement during the first seven-months of the year.
The NPL’s which stood at 16.2 per cent in December 2009, peaked at 20 per cent in February and has since improved to a position of 18.2 per cent in July 2010,” Mr Amissah-Arthur said.
Source: Daily Graphic