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BOG slashes policy rate by 1%

…Pressure on banks to cut lending rates

By Elorm DESEWU
Universal banks in the country would this week begin slashing their respective base lending rates between 50 and 100 basis points in response to the Monetary Policy Committee (MPC) of the central bank’s policy rate cut.

The MPC, led by the governor of the Bank of Ghana (BOG), Kwesi Amissah-Arthur, cut the policy rate by 100 basis points to settle at 15%, a reduction from 16%.
The policy rate, which serves as a benchmark, is the rate at which the central bank does overnight lending to universal banks in the country.

It serves as a basis for the banks in setting their respective base lending rates, as well as lend to their most favoured customers.

Headline inflation dropped from its March 2009 level of 20.5 per cent to 13.2 per cent last month. Monthly changes in the Consumer Price Index (CPI) continue to grow at a pace lower than trends observed in 2009. Food inflation, which was 18.4 per cent in March 2009, declined steadily to 7.4 per cent by March 2010.

Similarly, non-food inflation, which was 22.0 per cent in March 2009, declined to 17.6 per cent by March 2010.

According to Amissah-Arthur, interest rates have generally declined along the full spectrum of the yield curve - 8.7 percentage points on the lower end and 4 percentage points at the higher end - since December 2009.

The market observed shifts towards long-dated instruments, in line with easing inflation expectations.

Between December 2009 and mid-April 2010, the benchmark 91-day Treasury bill rate went down by 8.7 percentage points to 13.9 per cent. Similarly, the 182-day Treasury bill rate declined by 11 percentage points to 14.4 per cent.

The rate on the 1-year note fell by 5.0 percentage points to 15.0 per cent, while the 2-year fixed rate note went down by 7.3 percentage points to 16.3 per cent. The 3-year fixed rate bond also fell by 4.0 percentage points to 14.9 per cent.

On the interbank market, the average overnight interbank interest rates fell by 1.4 percentage points to 14.9 per cent during the same period.

After staying largely static initially, commercial banks have also begun revising their base and lending rates downwards in line with the general decline in interest rates and easing inflation expectations.

However, the declines have only been marginal and have not kept pace with the recent reductions in the policy and money market rates.

Average base rates of the banks were revised downward, after the previous policy rate cut, by 200 basis points, in February, into the range of 24.7 – 32.0 per cent, with an industry average of 29.9 per cent. Similarly, average lending rates were revised downward by 0.61 percentage points to 32.1 per cent into the range 23.6 – 39.9 per cent.

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