The Chief Executive Officer (CEO) of Ghana Association of Bankers – Mr. John Awuah has said that many factors account for the discrepancy between the policy rate and lending rates in Ghana.
He said the factors include the magnitude of change in the policy rate, fixed transactions, and policy rate transmission effect on the reference rate.
He said other factors also include bank size, market share and to a lesser extent deposit rates and non-performing loans ratio.
Mr Awuah was speaking on the back of the 98th press briefing by the Monetary Policy Committee of the Bank of Ghana which announced that the policy rate has been maintained at 14.5 percent.
The 98th Monetary Policy Committee (MPC) press briefing saw the MPC maintaining the Monetary Policy rate at 14.5%. The decision to maintain the policy at 14.5% for the 5th consecutive time, according to the Bank of Ghana was spurred by COVID-related factors, the quest to easing inflationary pressures, with inflation nearly returning to the upper band of the Central Bank’s target range of 6.0%–10.0% in October, and a continued improvement in macroeconomic conditions in the third and fourth quarter of 2020, which is as a result of the lifting of restrictions and strong policy support, which propelled signs of recovery, the governor expressed.
The policy rate is the interest rate that the monetary authority (Bank of Ghana) lends to universal banks and it is often set in order to influence the evolution of the main monetary variables in the economy (e.g. consumer prices, exchange rate or credit expansion, among others). Therefore, an increase or decrease in the policy rate is supposed to directly increase or decrease the lending rate by universal banks, all things being equal. However, this is not the case in Ghana as there are instances where the policy rate is decreased but does not influence the lending rate.
In understanding what accounts for the discrepancy between the policy rate and the lending rate, the views of the CEO of the Ghana Association of Bankers – Mr. John Awuah, were sought. He quipped that, the discrepancy between the policy rate and the commercial banks lending rate could be based on several factors.
Firstly, he posited that, oftentimes the policy rate does influence the lending rate in the same direction but not necessarily by the same magnitude. And that, a policy rate might surge by 1% but the lending rate may increase more than 1% due to several factors.
“People often expect the lending rate to follow exactly the direction of the policy rate but this is not the case. The thing is, the lending rate sometimes follows the path of the policy but not by the same magnitude. For instance, a 1% change in the policy rate will not result in a 1% change in the lending rate due to several reasons.”
He intimated that, the unproportionate change in the magnitude of the lending rate is predicated on the transmission mechanism through which the policy rate affects the lending rate. And that, the policy rate, first of all, influences the short-term interest rate which is the 91-day Treasury Bill, which then influences the Ghana reference rate on which the lending rate is pecked.
“The transmission mechanism from policy rate to lending rate is not direct as people perceived it. The announcement of a new policy rate, first of all, affect the short-term interest rate, which is the interest on a 91-Day T-bill. It is based on the T-bill rate that the Ghana reference rate is determined which eventually becomes the key indicator for determining the lending rate for universal banks.”
Secondly, he alluded to the time period of transactions as another major source of the discrepancy between the policy rate and the lending rate. He explained further that, some transactions are done before a change in the policy rate and banks cannot spontaneously change the rate on those transactions since it may adversely affect them. He said this accounts for the hysteresis or the lagging effect of policy rate on lending rate: hence the discrepancy.
“Some bank transactions are fixed transactions and some are done in prospective effect, therefore, banks cannot automatically reduce the interest rate on those transactions as they may be at the losing end. Therefore, the discrepancy can be traced based on the retrospective or prospective nature of the transaction.”
The discrepancy between policy rate and lending rate is often a topical issue which stems from the high interest rate spread which is a concern for investors.
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