Cut your rates before asking banks to reduce lending rates

A finance lecturer at the University of Ghana Business School, Prof. Godfred Bokpin is of the view that it may be premature for commercial banks in Ghana to lower their lending rates in response to the recent decline in inflation rate.

Bokpin’s comment follows the call by the Bank of Ghana for commercial banks operating in the country to reduce lending rates, as the country’s inflation figures continue to decline.

While Bokpin acknowledges that it is a good call, he emphasizes the importance of the Bank of Ghana’s policy rate and how it may respond in the coming months.

He believes that if the central bank believes that the process of disinflation has become entrenched and will decline sharply, then this should be reflected in the policy and treasury bill rate.

Bokpin also highlighted the three important variables in Ghana’s reference rates: the policy rate, treasury bill rate, and interbank rate.

He argues that if the rate at which the Bank of Ghana lends to commercial banks does not significantly decrease to reflect the reduction in inflation, then it does not have the moral right to ask commercial banks to do more than it is willing to do.

“Generally, we will say it is a good call but to the extent that it is coming from the Bank of Ghana is even more interesting. The question will be how will Bank of Ghana’s policy rate respond in the next couple of months. Because if it is the considered view of the central bank that the process of disinflation has become entrenched and will come down sharply, then that should also reflect in the policy and treasury bill rate.”

“There are three variables that are very important in the Ghana reference rates coming down. The policy rate, treasury bill rate and the interbank rate. So if the rate at which the Bank of Ghana itself will be lending to the commercial banks does not come down drastically to reflect the reduction in inflation, it does not have the moral right to ask commercial banks to do more than it is willing to do.”

Inflation has dropped to 41.2 percent for the month of April 2023.  This represents a 3.8 percentage point decrease from the 45.0 percent recorded in March 2023.

This was captured in the Consumer Price Index (CPI) data released by the Ghana Statistical Service (GSS) on Wednesday, May 10, 2023.

Per the data, food inflation also stood at 48.7 and Non-food inflation 35.4 %.