Introduction to Ghana’s Monetary Policy
The Bank of Ghana (BoG) has recently faced criticism for its decision to cut interest rates by 350 basis points to 21.5%. This move has been met with warnings from economists that it could lead to a resurgence in price pressures, just as Ghana is approaching single-digit inflation territory.
The Central Bank’s Defense
Dr. Philip Abradu-Otoo, Director of Research at BoG, has defended the decision, citing robust fundamentals that support the country’s economic recovery. Ghana’s inflation rate has dropped to 11.5% in August, marking the eighth consecutive monthly decline and reaching its lowest level since October 2021. This performance has already surpassed the government’s end-year target of 11.9%, creating what BoG officials characterize as fiscal space for more accommodative monetary policy.
The Impact of the Rate Cut
The rate cut represents the continuation of Ghana’s monetary easing cycle that began in July, when commercial banks responded to previous reductions by lowering lending rates approximately 2.5 percentage points. BoG expects similar or greater transmission this time, potentially providing relief to businesses struggling with high financing costs. However, the policy shift faces skepticism from industry observers who question whether Ghana’s financial system can handle rapid monetary loosening without compromising credit quality.
Supporting Factors
Dr. Abradu-Otoo highlighted the central bank’s assessment of supporting factors that differentiate the current environment from previous periods of monetary accommodation. International reserves remain strong enough to defend the cedi and finance imports, while economic growth momentum continues accelerating across key sectors. The country’s improved macroeconomic stability, following years of fiscal consolidation and International Monetary Fund (IMF) program implementation, has created conditions the MPC believes justify more aggressive easing.
Projections and Expectations
Looking ahead, BoG projects inflation could reach its medium-term target range of 6-10% by early 2026, establishing a foundation for sustained low interest rates and enhanced investor confidence. This timeline suggests the central bank views current price pressures as temporary rather than structural threats requiring continued monetary tightening. The rate cut’s effectiveness will depend largely on commercial banks’ willingness to pass through lower policy rates to customers, particularly small and medium enterprises that have struggled with credit access during Ghana’s high-rate environment.
Conclusion
The success of BoG’s strategy will ultimately be measured by its ability to maintain price stability while supporting economic expansion in Africa’s second-largest gold producer. As Ghana navigates this monetary policy transition, it is crucial to monitor the impact of the rate cut on the economy and make adjustments as necessary to ensure a stable and growing economy. The central bank’s confidence in its decision is rooted in the country’s robust fundamentals, and it is now up to the commercial banks to respond by passing on the benefits of lower interest rates to their customers.
