Macroeconomic performance to influence policy rate- Prof. Quartey

Despite high expectation on the part of the private sector for the Bank of Ghana(BoG)  to reduce the policy rate due to government's policy direction, some financial observers maintain that government's policy may not influence the outcome.

The Association Ghana Industries(AGI) for example has expressed hope in a reduction of the policy rate to correspond with government's policy direction of reducing taxes, hence cost of doing business.

The policy rate, which is the rate at which the Bank of Ghana lends to commercial banks is major factor in setting interest rates.

Speaking to Citi Business News, the Head of the Economics Department at the University of Ghana, Professor Peter Quartey stated that the Bank of Ghana considers all the macroeconomic indicators before altering the rate and not just the policy direction of government.

He argued that different factors go into the adjustment of the policy rate to stimulate economic activities for growth.

“The policy rate is changed or adjusted depending on what happens within the macro-economy. They look at inflation rate, they look at exchange rate, they look at GDP growth. So they will certainly have to wait and see how the private sector responds, how the GDP is going to grow and base on that, the Monetary Policy Committee will look at the policy rate and say, look inflation is coming down, exchange rate is stable, GDP is growing  and therefore we need to revise downwards the policy rate,” he explained.

Reacting to assertions that it will be prudent for the central bank to respond immediately to reduce interest rates; Professor Quartey maintained that the policy rate is just an item in the basket of activities that contribute to the high cost of borrowing.

“If you look at the cost structure [cost of borrowing] , the default rate is one of the key drivers. [Another is]The banks own operational cost. If you provide incentives and the private sector is able to produce and is able to increase their revenue base, default rate will come down, and when default rates come down it is certainly going to affect the interest rates,” he observed.

“So there are other areas that affect the cost of borrowing aside the policy rate. So the policy rate cannot just be adjusted for adjustment sake,” he said.

By: Lawrence Segbefia/citibusinessnews.com/Ghana