Bank of Ghana policy rate cuts will not significantly boost economic growth unless commercial banks reduce their lending rates. Dr. Sajid Chaudhry, an economist at Aston University, stated this critical finding. He emphasized that lower lending rates are essential to stimulate economic activity in Ghana.
Dr. Chaudhry expressed concern over the slow transmission of policy rate cuts by commercial banks to consumers and businesses. He noted that the effectiveness of monetary easing, which is when the central bank lowers interest rates, depends on lower borrowing costs. This directly translates into increased credit for the private sector. High interest rates choke off investment and consumption, which are key drivers of economic expansion.
This situation fits into Ghana's ongoing struggle to accelerate economic growth and manage inflation. The Bank of Ghana has recently lowered its policy rate in response to declining inflation. This move aims to make borrowing cheaper and encourage investment. However, if commercial banks do not follow suit, the intended benefits will not reach businesses and individuals. Data from 2002 to 2024 shows a clear link between lower lending rates and higher Gross Domestic Product (GDP) growth. Conversely, high interest rates and inflation have consistently weakened economic performance.
Dr. Chaudhry, also an International Fellow of the Institute of Economic Affairs, made these remarks at a forum on interest rates and economic development. He explained that commercial banks maintain wide net interest margins due to several factors. These include substantial non-performing loans, unstable exchange rates, and overall macroeconomic uncertainty in Ghana. Banks use these higher margins to cover the risks associated with lending in a volatile economic environment.
Thus, policy should combine monetary easing with measures that strengthen credit delivery and bank financial health. Dr. Chaudhry recommended that the Central Bank implement regulatory measures to encourage faster transmission of policy rate cuts to borrowers. This would ensure that businesses and individuals truly benefit from the central bank's efforts to lower borrowing costs. He also suggested improving deposit rates when monetary policy tightens to support savers.
To support lower lending rates and economic growth, commercial banks must strengthen their loan screening processes and monitoring systems. This would reduce the volume of bad loans. Companies, in turn, need to improve productivity and repay loans on time. When banks have many bad loans, they are less willing and able to pass lower policy rates through to cheaper lending. This weakens the overall impact of monetary easing on economic growth and job creation.
The government's role in maintaining macroeconomic stability is also crucial. This includes achieving stable exchange rates, controlling inflation, and ensuring prudent public spending. A sound banking sector also underpins the ability of banks to lend at lower rates. Decision-makers and markets will watch closely to see if commercial banks respond to the Bank of Ghana's rate cuts. Failure to do so could prolong Ghana's economic challenges, affecting job creation and national income.