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The Monetary Policy Committee of the Bank of Ghana (BoG) last week, announced a reduction in the policy rate by 150 basis points to 21 per cent from 22.5 per cent, citing lower risk to inflation and growth.
This monetary policy decision has been hailed by all stakeholders of the economy, especially those in the financial sector.
Moody’s rating agency, has also expressed satisfaction with the policy decision by the BoG. It said, right after the announcement that, the 150 basis points policy rate cut is credit positive for the country’s banks.
Moody’s noted that, the cut which exceeded market expectations of a 100-basis-point reduction will reduce their bank’s asset risks, which will outweigh the loss in profitability from lower interest income.
“Also, the rate cut signals abating inflationary pressures, indicating a gradually improving operating environment,” it added.
Also, some economists are predicting that commercial banks across the country will soon reduce their interest rates.
Economist, Professor Robert Darko Osei commenting on the development said, he is hopeful banks will reduce their rates soon especially as most key indicators are declining.
“Interest rate which is a derivative of the fiscal challenges is generally high although it has shown signs of declining. At least the T-bill rates are declining and again people are concerned that the banks are not responding. I feel we should just relax because they will respond soon. It is a matter of time. It has to be sustained,” he stated.
Figures from the Bank of Ghana (BoG) show that the 91 day Treasury bill is at 12.5 percent while that of 182 days is at 12.9 percent.
Following the decline, there have been concerns over why interest rates on loans for instance are still high.
But the banks have argued that the T-Bills only account for a slight percentage of the indicators used in calculating the rates.
He added, “The banks have to be assured that government’s borrowing is actually on the decline so that there is no sort of easy avenues for them to make money. Now when that happens, the forces of demand and supply will drive interest rates down.”
However, Dr Ernest Addison, the Governor of the Bank of Ghana, told a press conference that, the disinflation process is still ongoing and this trend is likely to continue all through till the end of the third quarter.
“Barring any unanticipated shocks, the current stance of monetary policy and expected stability in the exchange rate should ensure price stability.
“In the outlook, expectations are for the observed decline in headline inflation to continue and converge towards the medium-term target of 8±2 per cent in 2018,” he added.
The Governor is also hopeful banks in the country will eventually reduce their interest rates as inflation declines.
Currently, inflation is at 12.1 percent as the policy rate stands at 21 percent.
He stressed that with time, the banks will decrease the interest rates as inflation declines.
Consequently, Moody’s noted that since November 2016, the central bank has cut the monetary policy rate by five percentage points from a peak of 26 per cent.
This most recent rate cut is the Bank’s fourth consecutive reduction since November, and is in response to the central bank’s expectation that Ghana’s inflation rate will fall to its 6 per cent to 10 per cent target range from 12.1 per cent in June, Moody’s said.
Moody’s believes that the latest monetary policy rate reduction will reduce banks’ lending rates and asset risks, which increased substantially in 2016 and caused banks’ nonperforming loans to rise to 21.7 per cent of gross loans as of May 2017 from 14.6 per cent at the beginning of 2016.
“We expect borrowers’ debt repayment burden to fall further as the average lending rate decreases. The system average lending rate declined to 30.5 per cent in April 2017 from 32.03 per cent in November 2016, when the Bank of Ghana first began lowering the monetary policy rate, and we expect additional reductions in the system’s average lending rate to follow. Lower lending rates, together with declining inflation, will provide cash flow relief to borrowers, improving their repayment capacity and improving banks’ asset quality, although the system’s nonperforming loan ratio will remain high,” it pointed out.
Meanwhile, according to some heads of universal banks in the country, a drop in the policy rate from 22.5 per cent to 21 per cent cannot immediately translate into reduced interest rates on loans.
They maintained that much as the reduction signals a positive trend in macroeconomic dynamics, there was the need for customers of the banks to manage their expectations because there were other factors, including interest’s payments on fixed deposits that go into calculating interest rates.
The policy rate is a major determinant in the calculation of banks’ interest rates. It is usually used as a benchmark because that is the rate at which the central bank lends to the universal banks.
The year-on-year inflation rate, as measured by the Consumer Price Index (CPI), stood at 12.1 per cent in June 2017, down by 0.5 percentage points from the 12.6 per cent recorded in May 2017. This rate of inflation for June is the percentage change in the CPI over the 12-month period from June 2016 to June 2017.
Again, the Treasury bill rate has consistently dropped from the beginning of the year as a result of a reduction in the government’s appetite for domestic borrowing. The 91-day Treasury bill rate used by the banks to determine their lending rates also eased by 417 basis points from January to 12.6 per cent on July 21.
From the beginning of the year to June 2017, the cedi recorded a depreciation of 3.7 per cent against the US dollar, compared with a depreciation of 3.3 per cent reported in June 2016.
Under normal circumstances, the universal banks are supposed to react to these favourable macro-economic indicators to drop their interest rates to bring some relief to their customers.
But, the Managing Director of Universal Merchant Bank (UMB), Mr John Awuah reacting to questions about the impact of the 150 basis point reduction in the policy rate cautioned their customers.
Mr Awuah said, “We are happy as banks to have interest rates reduced because it has a positive impact on bad loans”.
However, he said most of the banks had funds from other sources such as fixed deposits which interests are determined and locked per annum and that could not be varied because “there is a drop in the policy rate”.
“A customer comes to lock funds in fixed deposits with my bank as an example and the interest paid is fixed for a term; until that term expires and we pay the interest, we cannot vary what we agreed to pay him because the policy rate has reduced”, he explained.
“Mind you, it is the same money we take that we lend so if the interest on the fixed loan is high, lending it will also be plus a margin”, he added.
Mr Awuah agreed fully with the Governor of the Bank of Ghana, Dr Ernest Addison, who upon announcing the policy rate which now stands at 21 per cent indicated that the universal banks would react to the drop in the policy rate in due course but not immediately because of the various dynamics that come to play.
Mr Awuah said the signal, including the stable currency, declining inflation and a drop in treasury bill rates were all positive indicators and asked for measures that would consistently keep the macro economy at appreciable levels to enable the banks to respond accordingly.
“We will definitely do something about it, that we can assure our customers when the times comes”, he said.
Similarly, the Managing Director of the Access Bank Ghana, Mr Dolapo Ogundimu asked customers of the various banks in the country not to expect an immediate reduction in lending rates following the reduction of the Bank of Ghana’s policy rate.
He said although the reduction in the policy rate was a step in the right direction, it would be wrong for customers to assume that the rates would drop immediately because there were lots of factors involved in determining the lending rates.
Moody’s in their report further stated that the rate cut and falling inflation also will support Ghana’s operating environment, boosting demand for new loans and benefiting banks’ revenue. Real private-sector credit contracted by 0.8 per cent in 2016 because of Ghana’s economic slowdown, during which real GDP growth decelerated to 3.5 per cent from an average of 7.7 per cent in 2010-15.
“We expect GDP growth to recover to 6.1 per cent this year and 7.5 per cent in 2018,” it said.
According to Moody’s the rate cut will reduce banks’ interest income earned from treasury bills, whose yields have already declined by an average of about 600 basis points since November 2016.
The banks’ investment in government bills and bonds, Moody’s says was high at 21 per cent of total assets as of April, and the Bank of Ghana classifies 72 per cent of these as short term, which creates reinvestment risks for banks.
“However, banks will partly offset the effect of lower interest income by reducing their deposit rates, thus lowering funding costs that constrained interest margins and profitability in 2016, albeit from a high base. As an example, the 90-day deposit cost increased to 15.25 per cent in April 2017 from 13 per cent in April 2016.
The increased cost of deposits reduced banks’ interest spread to 4.1 per cent from 5.1 per cent over the same period, lowering profitability as reflected by an average return on assets that fell to 4.0 per cent from 4.7 per cent over the same period,” the rating agency said.
However, for GCB Bank Limited (B3 stable, B31), the only Ghana-based bank that Moody’s indicated that the rate reduction will benefit its asset quality.
“However, the lower rate will likely harm GCB’s interest income because of its large sovereign debt portfolio (about 43 per cent of total assets as of the end of 2016),” it noted.
Source: Adnan Adams Mohammed