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ACCRA (Capital Markets in Africa) – Ghana’s central bank slashed its benchmark interest rate on Monday by two percentage points to 23.5 percent, noting signs inflation was trending downwards, in a move that may help spur lending and business activity.
Ghana was for years one of Africa’s fastest-growing economies but growth slumped in 2014 due to falling commodities prices, high inflation, a big budget deficit and public debt. As inflation eases, the bank can lower the cost of borrowing.
The size of Monday’s rate cut came as a surprise. It was the biggest by the bank since December 2006 and follows a 50 basis-point reduction in January.
“The (Monetary Policy) Committee noted that underlying inflation pressures have eased considerably and inflation is projected to trend downwards toward the medium term target,” Bank of Ghana Governor Nashiru Issahaku told a news conference.
The central bank has a medium-term inflation target of 8 percent, plus or minus 2 percentage points.
“There are indications that growth is likely to remain significantly below potential which, alongside an improved inflation outlook, provides some scope for monetary policy easing,” Issahaku said.
Ghana’s government took power on Jan. 7 and inherited a weak macro-economic position. It says stabilising the national finances is a top priority and a prerequisite for restoring rapid economic growth through a boost to the private sector.
The Bank is independent but Monday’s reduction serves President Nana Akufo-Addo’s purpose to find ways to stimulate private sector growth, economists said.
It is unlikely, however, to lead to a reduction of commercial rates in the short term in part because a gap remains between the bank rate and the benchmark 91-day treasury bill, which stood at 17.5103 percent on Friday, economists said.
“There was a huge mismatch that had to be corrected …. (But) in the real world, not much has changed,” said Joe Jackson of Dalex Finance, a non-bank financial institution in Accra.
“Commercial bank lending rates will not come down. The challenge is that the fundamentals haven’t changed,” he said.
Inflation stood at 13.2 percent in February, but the government said it is confident it can meet its 2017 end-year inflation target of 11.2 percent. There was little movement in the cedi against the dollar, which stood at 4.3650 at 1357 GMT.
The government is to renegotiate targets set in a $918-million International Monetary Fund programme aimed at helping Ghana stabilize its economy.