The Bank of Ghana (BoG) has signalled a further reduction in the cost of borrowing with a significant reduction in its policy rate – the rate at which it lends to universal banks.
The central bank reduced the policy rate from 21.5 per cent set in September this year to 18 per cent, marking the second consecutive big cut since May this year.
The Governor of the BoG, Dr Johnson Pandit Asiama, who announced this at a press conference in Accra on Wednesday after the 127th Monetary Policy Committee (MPC) meeting, stated that the reduction was a reflection of the continued decline in inflation, strong economic growth and improved external buffers.
In addition to the reduction in policy rate, the BoG also announced that it would now resort to the use of the 14-day treasury bill as its main liquidity management tool, a departure from the 91-day treasury instrument, which has been the benchmark for the market.
The lower rate is expected to allow financial institutions to extend more affordable credit to various customer groups, helping businesses expand to support job creation and individuals to meet their needs.
Dr Asiama stated that the majority of committee members supported the decision to reduce the rate by 350 basis points to 18 per cent.
“The committee will continue to monitor developments and take the appropriate policy decisions to ensure sound and stable macroeconomic conditions.
“In addition to the policy rate reduction, the bank will now return to the use of the 14-day treasury bill as its main instrument for conducting open market operations,” he said.
Return to 14-day bill
The Governor stated that the return to the 14-day treasury instrument as the bank’s main liquidity management tool signalled a renewed effort to streamline market operations and reinforce the transmission of policy decisions to interest rates across the economy.
He said that the measure was prudent, coming at a time when confidence indicators pointed to improving sentiments among consumers and businesses.
He explained that the committee’s latest assessment showed that the broader macroeconomic landscape had stabilised faster than initially anticipated.
That, Dr Asiama said, was largely helped by disciplined fiscal management, favourable external conditions, stronger export performance, and a rebound in domestic production activities.
The Governor said the gains had created an enabling environment for the policy rate cut, which the MPC expected would feed more effectively into the pricing of loans, ultimately lowering the cost of borrowing for households and firms.
Dr Asiama added that the decision aligned with the bank’s medium-term strategy to support the real sector and sustain the current growth momentum, particularly in agriculture and services, which had remained the key engines of expansion throughout the year.
Continued disinflation
The Governor stated that the continued disinflation — reflected in consistent month-on-month declines in headline inflation and well-anchored expectations —provided further assurance that easing the policy rate would not jeopardise stability, but rather deepen the recovery already underway.
“Inflation decline in the year has been steady and on target. From 23.5 per cent in January 2025, headline inflation has eased to the bank's central target of 8.0 per cent in October,” Dr Asiama said.
The Governor, who also chairs the MPC, said the strong external buffers, including the accumulation of reserves to over $11 billion and the strengthening of the cedi by more than 32 per cent against the US dollar, provided significant room to navigate any short-term external shocks, while giving policymakers the flexibility required to support domestic demand.
Governor Asiama said the central bank remained cautious in spite of the improvements, pointing to lingering risks such as uncertain global commodity prices, geopolitical tensions and potential spillovers from tightening cycles in advanced economies, all of which could pose challenges to the exchange rate and inflation outlook.
Take advantage
Dr Asiama urged financial institutions to take advantage of the more favourable environment to expand credit to productive sectors, support small and medium enterprises (SMEs), and enhance innovations in financial intermediation.
He said the recent pick-up in private sector credit was encouraging, but still below the levels required to fully unlock the country’s growth potential.
The Governor explained that sustaining the current macroeconomic gains would require continued coordination between monetary and fiscal authorities, disciplined spending management and unwavering commitment to structural reforms.
That should be aimed at improving revenue mobilisation, reducing vulnerabilities in the financial system, and boosting investor confidence, he said.
Public assurance
Dr Asiama assured the public that the central bank would remain vigilant and data-driven, ready to adjust its stance should new risks emerge or if inflation deviated from its expected path in the coming months.
He expressed optimism that the policy actions, combined with ongoing reforms across sectors, would lay the foundation for stronger, more inclusive growth next year, as the economy continued to transition from stabilisation to sustained expansion ahead.
Source: Graphic Online
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