The Monetary Policy Committee (MPC) of the Central Bank is expected to sit on Tuesday to review and deliberate on monetary trends in the economy. This year's first sitting comes against the backdrop of renewed calls to lower the cost of loans, a perennial issue that affects all borrowers. In the cross hairs are banks and in particular, their observed inclination to maintain high lending rates despite the MPC's consistent reduction in the Central Bank Rate (CBR). Many argue that local banks are acting inequitably by lowering rates payable on savings faster than the cost of loans in an apparent strategy to maintain a wide spread between lending and deposit rates. This spread underpins the large profit that the sector enjoys and in some ways commentators imply this apparent desire for extraordinarily high profits robs other sectors of business opportunities. The MPC has been in an interest rate cutting phase that started in mid-2012 during which time it has lowered the CBR from a high of 18 per cent to the current level of 8.5 per cent. READ: Large banks squeeze more profits out of customers than small lenders More recently, the MPC has opted to leave the rate unchanged to give time for earlier interest rate cuts to work through into the economy. Annual inflation today hovers at about eight per cent year-on-year and the immediate outlook is that things will remain on hold on this front. In my view, this fact alone leaves the MPC with little option but to leave the CBR unchanged. However, the paramount issue in my mind is the change in the MPC's actions over the past 12 months. It is crucial that business starts to attune itself to the changes being instituted in our monetary policy regime. The Central Bank has progressively refined its interventions over this period by employing a greater focus on inflation outcomes. Inflation targeting is slowly being implemented with the Central Bank aiming to maintain the rate of change in prices of goods and services at between 2.5 per cent and 7.5 per cent. In this scenario one would expect that policy actions would lean towards higher interest rates when inflation is close or above the upper band and lean towards lower interest rates if inflation hovers towards the lower end of the scale. The MPC will aim to steer future inflation outcomes to within this band and hence spawn a macro-economic environment founded on low, predictable inflation. This is the nub of the entire discourse over interest rates. If the Central Bank is successful in predicting inflation outcomes and how monetary transmission works in the economy, then business (especially banks) will operate in a gentler commercial environment. This should allow a gradual lowering of risk perceptions and set us well on the road to lower lending rates. All other businesses should also recalibrate their profit expectations downward and internalise the fact that profit growth will have to come from productivity improvements rather than fat profit margins. The debate over interest rates tends to focus on lending rates while forgetting the depositor. I'll be the first to admit that the case against the banks is less clear on this one. Any depositor can walk into the bank and negotiate a higher interest rate on their deposit if they so wish. For some reason many don't seem to be bothered preferring to leave their hard-earned cash in current accounts. This may have something to do with liquidity preference. Nevertheless, other financial sector players should re-imagine their businesses and look for ways to attract these idle deposits away from banks. The MPC will need time to roll out its refinements, until then it should put more effort to improve clarity of its communication so that its intentions are better understood by the broader business community. As for the rest of us we have to resort to moral suasion, the loud and noisy variety, to encourage banks to be more reasonable in their lending rate policies or more specifically – their profit expectation. A little hard work can't hurt. Mr Bunyi is a financial analyst at Mavuno Capital .
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