How Monetary Policy Rate Affect Economics Activities


The prime rate/ monetary policy rate (MPR) is an economy tool used by central bank to control money supply and to lend money to all the commercial bank in the countries.By economy theory, a change(reduction in prime rate will trigger a reduction in base rate,cost of credit and increase the country Gross Domestic Products while lower the interest rate and discourage saving.In fact this theory hold all other economies  variable constant and is therefore confronted by the  complexities of other macroeconomics variable.

   In Ghana economy for instant, the monetary policy  rate( MPR) is expected to influences the market interest rate  and inflation rate through several channel with aim of stabilizing currency,creating jobs and to support economies growth.The current reduction in MPR is a direct response to the reduction in inflation from 18.7%(2016) to 13.2% in February 2017 which obvious affect individual, financial institution and businesses in divert ways

 Effect on the Economic Activities

 Business and Consumers

  A reduction in MPR  will prompt a reduction in lending rate thereby making borrowing cheaper. This will encourage business to more loan to finance greater spending and  investment.Consumers are likely to benefited from reduction in MPR through lower price in all commodities.The overall benefit of lower MPR is to trigger a rise in aggregate demand leading to high economic growth.

 Equity Market

 It is important to note that lower interest rate are good news for borrower but bad news for savers who will have their interest on fixed deposit reduced. The positive impact on consumption along with lower interest wouls also enhanced the profitablity and valuation for the equity market in a sense that unsatisfied saver will now shift their deposit from money market to a more profitable  but risky equity market.This will mean that firm listed on the capital market will now expand their operation with cheaperfund from saver thereby expanding the private sector and provide more employment opportunity.

 Financial Institution

   Monetary policy work successfully in a relatively efficient industry and market environment, however the situation is different in a Ghanaian economy. it is evident that commercial bak fix their base rate irrespective of of change in MPR. according to these bank, cost  of  fund is the major ingredient that influence their base rate.They also carry an expensive and long term fund which may not have nature as at the time of reduction, making its difficult for them to reduce their base rate to reflect the change in MPR. In fact, the money market interest rate largely depend on the real inetrest rate and the inflation but the necessary on the MPR, the base rate of commercial bank will alway be in variance with MPR until the market digitizes are eliminated.

 Government

 The reduction in MPR will create more job opportunity through economic growth which will lead to the increase in tax revenues. However, the government will find its difficult to borrow from the general public fro developmental project. The effect of this policy initiative will in a short term trigger unfavorable depreciation in the local currency against the major competing currency.

    In conclusion, MPR is an economic tools used to achieve currency stabilization, reduce inflation, create jobs and to support economic growth.However this argument is inconsistent  with the realities in the Ghanaian economy. To address theses challenge, the economy should  operate largely on the credit base instead on the Cash system. The government intervtion to reuce banking risk by implemting national identification system will ensure effective operation of credit bereau making treasury bill investment unattractive to the general public

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