Further reduce policy rate in the wake of COVID-19 – Economist tells BoG

Further reduce policy rate in the wake of COVID-19 – Economist tells BoG

Dr Lord Mensah - Economist

An Economist, Dr Lord Mensah, is urging the Monetary Policy Committee of the Bank of Ghana to further reduce the policy rate to bring enough relief to businesses and individuals hit by the impact of the COVID-19 pandemic.

Starting today, Monday, May 11, 2020, the Monetary Policy Committee (MPC) will begin its meetings to review the measures put in place since the outbreak of the coronavirus and also to evaluate the impact on financial institutions.

In Dr Mensah’s explanation, he believes reducing the policy rate will help bring interest rates down and reduce the cost of borrowing.

Earlier last month, the Bank of Ghana reduced the policy rate by 150 bases point to 14.5 per cent following the economic impact caused by the outbreak of COVID-19 in the country.

The policy rate, which determines the rate at which the central bank lends to commercial banks, also affects the cost of borrowing as well as how much interest people pay on their loans.

The Ghana Association of Bankers earlier announced a cut in its benchmark interest rate by 200 basis points to mitigate the economic impact of COVID-19 on businesses and individuals.

The 200 basis points reduction in interest rate translates to a 2 per cent reduction on loans acquired from the bank.

Speaking in an interview, Dr Lord Mensah maintained that a further reduction in the policy rate will send a clear signal to financial institutions to follow suit by reducing interest rates.

 

“Well, you see that for several consecutive times, the policy rate was not reduced. And this was the first time they reduced it up to 14.5%. So, if you have a trend and then a certain reduction is done, you look at the sustainability of that reduction. So if they really want to have their policies going through very well or make sure that funds get to the people and businesses to go through their normal activities, obviously they have to reduce it further and that would have impact,” he said.

 

“That once a time in about two years that it was reduced, I would say that it did not have impact, but consistently, if it gets reduced at this time, I am hoping that the banks would respond to it and then various financial institutions will also respond to it,” he added.

 

As the coronavirus outbreak continues to spread, the negative impact on businesses continues to travel with it.

In Ghana, though businesses are already reacting, the government has announced some measures put in place to provide some relief.

Gov’t Interventions

Last month (April 2020), the government announced the rolling out of a soft loan scheme of six hundred million cedis (GH¢600 million), to support micro, small and medium scale businesses, which is expected to be disbursed this month (May 2020).

Also, commercial banks, with the support of the Bank of Ghana, have instituted a three billion cedi (GH¢3 billion) credit and the stimulus package, to help revitalise industries, especially in the pharmaceutical, hospitality, services, and manufacturing sectors.