Policy rate alone won’t determine lending rates, inflation will – Economist

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Economist, Professor William Baah Boateng

Economist and head of the economics department at the University of Ghana, Professor William Baah Boateng, said it was prudent for the Bank of Ghana to raise the policy rate from 19% to 22%.

According to him, commercial banks would have raised their lending rates even if the central bank had not raised the key rate.

The policy rate was raised by 300 basis points to 22% after an emergency meeting of the monetary policy committee was held on August 17, 2022.

Data from the Ghana Statistical Service showed that inflation for July had reached 31.7%.

The central bank said the hike in the policy rate is a measure to deal with rising inflation and the rapid depreciation of the local currency.

Professor Baah Boateng said that because inflation was largely imported, the bank’s measure is a way to make local investment attractive and reduce demand for foreign currency.

Speaking on PM Express Business Edition of JoyNews on August 18, 2022, he said that “raising the monetary policy rate is a way to shift investors’ attention to the local economy.”

He added: “The policy rate will not be the only thing that determines lending rates. Commercial banks will not wait for the Bank of Ghana to raise their lending rates. Commercial banks will not wait for the Central Bank, they will look at the evolution of inflation, to fix their lending rate to ensure that the money they give will not be wasted.

“When inflation rises, commercial banks will look at inflation rates and not just the policy rate,” the economist pointed out.

He also said that the cedi’s woes can be solved if the Bank of Ghana is able to reduce speculation and demand for dollars.

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