Zero interest rate will not be feasible -Eric Okyei Baffour Replies Kobby Mensah

Mr Eric Okyei Baffour, a member of the New Patriotic Party’s (NPP) communications has challenged Economist Kobby Mensah for his comments zero interest rate.

According to him, suggestion from Economist Kobby Mensah telling Bank of Ghana to bring interest rate to zero is not feasible.

He further stressed that bringing down interest rates to zero percent is a drastic monetary policy measure that can have both benefits and drawbacks, depending on the economic context and the specific goals of the government. Here’s a breakdown of the potential economic effects:

Stimulating Investment and Consumption

“Lower interest rates make borrowing cheaper for businesses and consumers, encouraging investment in capital projects, expansion, and purchases of durable goods such as homes and automobiles. This can stimulate economic activity and boost aggregate demand,”Eric Okyei said.

Squeezing Net Interest Margins:

According to Eric Okyei, financial institutions, such as banks and credit unions, rely on net interest margins—the difference between the interest earned on loans and the interest paid on deposits—to generate profits. Zero interest rates can compress net interest margins, reducing profitability and potentially limiting lending capacity.

Creating Dependency on Low Rates

He stated that persistent low or zero interest rates can create a dependency on accommodative monetary policy, making it challenging for central banks to normalize interest rates without disrupting financial markets or triggering economic slowdowns.

Distorting Financial Markets

Eric Okyei said zero interest rates can distort financial markets, leading to misallocation of capital and excessive risk-taking behavior. Investors may chase higher yields in speculative assets, leading to asset bubbles and eventual market corrections.
Reducing Incentives for Saving.”

“Low or zero interest rates provide little incentive for individuals to save, as the returns on savings accounts and fixed-income investments diminish. This can discourage household saving, potentially leading to lower levels of investment in the long term.”