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Cost of Borrowing: World Bank backs a monetary policy hike

The possibility of an increase is not really seating well with some banking sector players who believes that a further hike in the policy rate will further increase the cost of borrowing in the country.

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The IMF has backed a possible increase in the Bank of Ghana's monetary policy rate later Monday morning.

Analysts say the rate is likely to inch up further from an already record- high of 26%. The IMF believes a higher monetary policy rate will help check demand side inflation.

The possibility of an increase is not really seating well with some banking sector players who believes that a further hike in the policy rate will further increase the cost of borrowing in the country.

Presently the policy rate sites at a 25-year record high of 26%. This however, is a merger of the monetary policy rate and the reverse-repo rate.

The monetary policy rate is the base rate from with commercial banks peg their interest rates, whereas the reverse- repo rate is the commercial rate at which the Bank of Ghana lends to banks as determined by the demand and supply of funds and other market forces at  the particular time.

Meanwhile, Economist and Financial analyst at Economic Policy Think tank, Afrinvers PLC, Patrick Stephenson believes  With inflationary pressures still persistent, and gradual adjustment of the economy to the recent hikes in utility, petroleum and income taxes, together with the extraneous challenges the economy will face in 2016, it is likely that the monetary policy authority will in its next decision increase of maintain the policy stance.

 However, the recent antecedents in its decisions will suggest that this will be less desirable as it will not deliver the results the authorities will be pursuing. At this point the monetary authority has to balance the objective of growth recovery against price stability and given the inability of the recent hikes to aggressively ‘catch’ inflation, it will be prudent to change course and support growth recovery.

 This will require a decline in the monetary policy rate! Will this be counterproductive? The correlation between the policy rate and other indicators as mentioned is loose, which could suggest less devastating results as will be predicted.

Given that policies are evaluated by their outcomes and not their objectives, the entire economy earnestly awaits this decision and the possible results it will deliver by the end of the first quarter of 2016.

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