Interest rates to tumble

The Bank of Ghana (BoG) will find room to cut interest rates when its rate-setting committee meets next month to reconsider its monetary-policy settings, according to analysts.

“There is room for the monetary-policy committee (MPC) to lower interest rates by about 200 basis points -- especially if the government signals fiscal consolidation in 2013,” said Sampson Akligoh, Head of Databank Research in Accra.

The BoG has not lowered its benchmark policy rate since July 2011, when it brought the rate down by 50 basis points to 12.5 percent. In 2012 the Bank boosted the policy rate by 250 basis points to 15 percent as part of a raft of actions to stem a pernicious slide in the cedi on the foreign exchange market.

The cedi suffered losses of more than 17 percent against the dollar in the first half of 2012, before an aggressive response by the BoG stopped the descent and held the value of the local unit steady till year-end. Overall, the currency lost 17.5 percent against the dollar last year.

Among its measures, the BoG offered fat yields on Treasuries and bonds to lure investors to local currency assets and mobilise the excess liquidity that was driving a surge in spending, especially on imports.

Between January-December, the yield on the government’s three-month Treasury bill rose from under 11 percent to more than 20 percent, drawing investors to the bills but increasing the government’s debt-servicing costs.

“While currency risk might occasion the BoG to keep the rate steady, [a rate-cut] will be efficient for the economy as higher interest rates add to the debt-burden of the country,” said Akligoh. He forecast yields to tumble in the first quarter.

“We are in to witness interest rate declines, albeit marginally, for the money market yields. But this does not necessarily mean transaction rates will decline; this will take some time.”

An analysis of the relationship between the policy rate and commercial banks’ lending rates in the past 12 months showed a weak correlation, said Dr. Joseph Abbey, Executive Director of the Centre for Policy Analysis (CEPA).

“The lending rates don’t seem to be responsive to the monetary-policy rate. In fact, we found that in the course of 2012 there has been a negative correlation between the monetary-policy rate and the average lending rate.”

A cut in the policy rate is possible next week, “but in terms of the reality and impact, it would be just a token,” he said. According to the BoG, the average lending rate of banks shed a meagre 0.2 percentage points in the nine months to September 2012, falling from 25.9 percent to 25.7 percent.

“If we don’t solve the problem of access to credit and cost of credit of our SMEs, youth unemployment will not come down,” Dr. Abbey said.

Despite Ghana’s economic growth ratcheting up to 14.4 percent and 7.1 percent in 2011 and 2012 respectively -- following the onset of the hydrocarbons industry -- job-creation has occurred more slowly, analysts say.

Half of all university graduates are reckoned to remain without a job two years after their mandatory national service.

The International Monetary Fund (IMF) expects Ghana’s economic growth to be 7.8 percent this year; and the government has promised an average of 8 percent per annum between 2013-16, with inflation below 10 per cent.