Ghana’s Bold Rate Cut: Policy Catch-Up or Premature Pivot?

A 300 basis point cut in the policy rate, from 28% to 25%, is substantial by any standard — especially in an economy with persistent exchange rate fragility and a history of inflation volatility. 

Ghana’s Bold Rate Cut: Policy Catch-Up or Premature Pivot?

On 29 July 2025, the Bank of Ghana (BoG) announced a bold 300 basis point cut in its benchmark policy rate, lowering it from 28% to 25%. This marks one of the most aggressive loosening moves in recent years and signals a strong vote of confidence in Ghana's ongoing macroeconomic recovery.

However, beneath the surface of this headline decision lies a complex landscape of structural dislocations, liquidity mismatches, and market distortions. The core issue is no longer the availability of liquidity but rather the alignment of policy signals with market realities.

1. The Disinflation Success: A Justification for Easing?

Inflation has moderated significantly to 13.7%, down from the crisis peaks of 2022. This disinflation reflects coordinated fiscal tightening under the IMF programme and prudent monetary measures that have curbed demand-side pressures.

From a textbook perspective, the sharp fall in inflation would justify a monetary policy pivot towards easing. Real interest rates had become severely positive, stifling private sector credit and dampening post-pandemic recovery prospects.

But is the rate cut catching up with market dynamics, or is it a premature easing in a structurally fragile environment?

2. Liquidity Is Abundant, But Lending Rates Remain High

The Ghanaian banking sector is currently flush with liquidity:

• 91-day Treasury bill yields have dropped to 10.29%.

• The interbank lending rate is reportedly below 15%, far beneath the official figure of 24%.

• Recent Treasury bill auctions saw oversubscription rates exceeding 85%.

Yet, paradoxically, lending to the private sector has not expanded meaningfully. Banks, grappling with excess cash, are reluctant to accept fixed-term deposits and are actively shifting towards cheaper current account balances. However, the cost of borrowing for businesses and consumers remains prohibitive.

3. The Ghana Reference Rate (GRR): A Structural Bottleneck

At the heart of this disconnect is the Ghana Reference Rate (GRR) — the benchmark that governs lending rates. The GRR is calculated using the following weights:

• Monetary Policy Rate (MPR) – 40%

• Interbank Rate – 20%

• 91-day Treasury Bill Rate – 40%

Given the current configuration, the high MPR disproportionately influences the GRR, keeping it elevated at around 23%, despite market indicators suggesting significantly lower cost of funds.

This rigid formula effectively locks in high lending rates, impeding credit transmission and stifling economic recovery.

4. The FX Market Premium: A Persistent Vulnerability

Another critical challenge is the persistent divergence between official and parallel market exchange rates. Despite disinflation and liquidity improvements, speculative pressures and structural FX shortages keep the Cedi under stress.

A rapid rate cut could exacerbate these pressures by reducing the real return on Cedi-denominated assets, incentivising capital flight and dollarisation.

5. The Strategic Trade-offs for Monetary Policymakers

Policy Imperative	Risks and Constraints
Align MPR with market-based rates to reduce GRR	Risk of undermining monetary anchor and fuelling FX volatility
Support private sector credit and economic recovery	Potential unmooring of inflation expectations if easing is too aggressive
Maintain investor confidence through credible forward guidance	Requires robust FX interventions to manage liquidity spill-overs

6. The Path Forward: Policy Choices for the MPC

The BoG and its Monetary Policy Committee (MPC) face a delicate balancing act:

1. Accelerated Policy Realignment: Gradually lowering the MPR towards the sub-20% range to synchronise with evolving market rates, while managing expectations through clear and conditional forward guidance.

2. Structural Reform of the GRR Framework: Recalibrating the formula to reduce the over-reliance on the MPR weighting, allowing market-based rates (interbank and T-bills) to play a more significant role in determining lending rates.

3. FX Market Unification Strategy: Enhancing transparency and liquidity in the FX market to narrow the official-parallel market premium, thus reducing speculative incentives.

4. Sterilised Interventions: Conducting open market operations to manage excess liquidity, ensuring that rate cuts do not translate into unchecked currency depreciation.

5. Strengthened Fiscal-Monetary Coordination: Maintaining discipline on the fiscal front to support the BoG’s policy credibility, while ensuring programme targets under IMF supervision are met.

Conclusion: The Imperative of Policy Alignment

Ghana’s economy does not lack liquidity. What it lacks is policy alignment and transmission efficiency. The BoG's recent rate cut is an essential step, but without structural reforms to the Ghana Reference Rate and a coherent FX unification strategy, the benefits of easing will remain muted.

The next phase of policy action must decisively address these bottlenecks. The challenge is not merely to adjust rates but to ensure that monetary policy becomes an effective tool for real sector revitalisation.

The future of Ghana’s economic recovery depends on it.

This article integrates insights from "Why Are Interest Rates Still High? The MPR vs Market Rates Debate" originally shared via https://www.facebook.com/share/p/16cAp8MrFp/.

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