The debate over high lending rates is not going away anytime soon, with the Institute of Economic Affairs ( IEA ) urging the Bank of Ghana, the government, and commercial banks to play their responsibilities efficiently in lowering borrowing costs.
While it wants the Central Bank to find a more effective approach to manage inflation, among other things, the economic and policy think tank is urging the government to limit its borrowing in order to lessen pressure on lending rates. It also encourages banks to lower their operating costs and increase operational efficiency.
“Lending rates have been out of control in Ghana for years. This is the result of a multiplicity of factors, including persistent inflation; high cost of monetary policy; banks’ inefficiencies and high operational costs; high borrower risks; government incessant borrowing; and high bank taxes”, its Director of Research, Dr. John Kwakye disclosed at a roundtable discussion on “Making Monetary Policy in Ghana More Fit-For-Purpose”.
He also said “the persistence of high lending rates has had a negative effect on investment, growth, and employment. Given the multiplicity of causes, monetary policy alone cannot resolve the problem. The solution must come from multiple relevant fronts”.
“BoG has a duty in ensuring a more effective way of controlling inflation so that monetary policy itself does not fuel lending rates. BoG must strengthen safety nets for borrowers, including through identification and credit worthiness schemes. BoG must ensure strong oversight of the banking industry to engender efficiency and high standard of operation and to prevent collusive and “customer capture” practices that tend to sustain high lending rates and other financial charges”, he pointed out.
“Banks, on the other hand, must improve their operational efficiency and reduce their costs to a minimum, including through modernisation of their processes and systems and through strategic company focus and foresight planning, so that these do not feed into lending rates. Meanwhile, government must restrain its borrowing to reduce pressure on lending rates by addressing the budget deficit bias. Government must also ensure that banks’ taxes are not out of proportion or inordinate so that they do not overly overburden them and thereby fuel lending rates”, he added.
The MPC will keep the policy rate at 14.5 percent.
Meanwhile, the IEA believes it is unlikely that the Bank of Ghana’s Monetary Policy Committee would raise the policy rate, which is now at 14.5 percent, on Monday, January 31st.
This is due to the fact that the 1.0 percent rate rise in November 2021 has yet to properly influence the economy.
“Recalling that the MPC increased the Policy Rate by 100 basis points just two months ago at its November meeting, the likelihood of another follow-up increase may be low since the last hike needs time to work itself through the system. Also, importantly, such a decision would appear to be counter to what the Committee has touted as a successful enduring process of disinflation and the lowering of interest rates in recent times. Given these contending issues, our expectation is that the MPC will try and play it safe by holding the Policy Rate at its current level of 14.5%.”
“This should allow the Committee to buy a little bit of time until its next meeting in March 2021 when a few more inflation readings would have made the situation clearer on how to position the Policy Rate.
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SOURCE: myjoyonline
