Policy rate reduction must reflect in banks’ lending rates – Prof. Assibey

The latest reduction of the policy rate to 14.5 per cent by the Bank of Ghana (BoG) must reflect in bank’s lending rates to the private sector, an economist from the University of Ghana’s Economic department, Professor Eric Osei Assibey has said.

He said this would help mitigate the hardship that the private sector is currently going through as a result of the outbreak of the Covid-19 virus.

This, he said would also help local manufacturers bridge the shortfall in the supply of some goods in the era of the global pandemic.

According to Professor Eric Osei Assibey, banks are expected to generate the margin of reduction in their cost of credit to businesses.

“It is one thing reducing the policy rate and another thing the banks also reducing their lending rates because banks take into account several other factors including the systemic risks in the system. And so what we expect in this new policy rate reduction will be that the banks and the private sector will also react positively and favourably in a way that will transmit to the ordinary Ghanaian so that the lending rates and interest rates on borrowing will go down significantly,”

Additionally, even though the economist agrees with the fact that there is more room for a reduction, he said the COVID-19 presents a fitting condition for the central bank to heed calls for a reduced policy rate.

Also, the minimum capital requirement of 400 million cedis required of banks is the country has also been slashed by fifty per cent to give flexibility to banks to operate, a situation to lower the burden on banks in the wake of the global crises.

Currently, the buffer is now pegged at 1.5% from the initial 3%.

Prof. Osei Assibey again said this should improve liquidity in the system by reducing the risks faced by banks in offering credit to businesses.

“With the buffer reducing to 1.5% meaning that the capital adequacy ratio now has also reduced, so banks don’t have to have so much capital against high-risk assets; which then means that the banks can give out more loans even to risky sectors; and so it is all geared towards increasing liquidity in the system,”

At the moment, businesses are expected to await the impact of the Central bank’s decision on the economy even at a time that appeals have been rife for the government to provide incentive packages to some critical sectors rather than a lockdown which is likely to affect economic activities deeply.