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2017 budget not a panacea to reduce policy rate - Economist

March 13, 2017, 1:02 p.m.

Despite government’s intention to pursue a pro business economic agenda in its fiscal policies, some financial observers are skeptical the managers of the monetary policy will respond by reducing the Policy Rate in its next meeting.

Earlier views gathered by Citi Business News from players in the financial sector pointed out that the central bank may have to consolidate some of the fiscal initiatives outlined by government in the 2017 budget by reducing the policy rate to decrease the cost of borrowing.

But speaking to Citi Business News, the Head of Economics Department at the University of Ghana Professor Peter Quartey cautioned that the decisions of the Monetary Policy Committee (MPC) are not merely based on the budget of the government but the results of the fiscal policies.

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.