The Bank of Ghana (BoG) has announced a significant 200-basis-point reduction in its Monetary Policy Rate, bringing it down to 27%. This is the second rate cut since 2021, and it comes as part of a broader effort to provide relief to borrowers while reflecting the easing inflationary pressures in the economy.
The policy rate had remained steady at 29% for nine months after an initial reduction from 30% in January of this year. The latest cut is expected to offer much-needed respite to borrowers, at least for the next two months, as the cost of borrowing is anticipated to decrease, easing the financial burden on individuals and businesses alike.
Dr. Ernest Addison, the Governor of the Bank of Ghana, addressed the change during the 120th Monetary Policy Committee press briefing on Friday, September 27. He explained that the decision to lower the policy rate reflects recent improvements in the economy and a softening of inflation. According to Dr. Addison, the Bank of Ghana’s assessment shows that macroeconomic conditions have generally improved since the last MPC meeting in July 2024.
“In the assessment of the Committee, preliminary data since the last MPC meeting held in July 2024 indicates that macroeconomic conditions have generally improved. Headline inflation has eased, and growth has picked up,” Dr. Addison stated.
He further elaborated on the current state of fiscal policy, noting that it has been robust and supportive of economic growth. Additionally, monetary conditions have remained tight, contributing to the disinflation process. These factors have collectively created a favorable environment for the reduction in the policy rate.
Dr. Addison highlighted that headline inflation, which has been a major concern in recent years, has declined for five consecutive months. The drop in inflation has been significant, with a reduction of 5.4 percentage points since the first quarter of this year. Similarly, core inflation, which excludes the more volatile components such as food and energy prices, has also decreased sharply by 6.9 percentage points over the same period.
“These trends suggest that the disinflation process is on course,” Dr. Addison said, expressing optimism about the continuing progress in controlling inflation.
The latest economic forecasts provided by the Bank of Ghana show that inflation is expected to continue easing. The central bank predicts that inflation will move closer to its target range of 13-17% for the year and gradually align with the medium-term target of 6-10% by the end of 2025, provided no unforeseen shocks disrupt the current trajectory.
“At the current juncture, the committee judged the risks to the inflation outlook as fairly balanced,” Dr. Addison added, reinforcing the positive outlook for the country’s economic performance.
Based on these considerations, the Monetary Policy Committee made the decision to lower the policy rate by 200 basis points to 27%, marking a pivotal moment in the Bank of Ghana’s efforts to support economic recovery while maintaining price stability.
The decision to cut the policy rate comes at a time when borrowers, particularly those in the private sector, are facing challenges due to high borrowing costs. By lowering the policy rate, the BoG aims to reduce the cost of credit, thereby making it easier for businesses to access loans and finance their operations. This move is expected to stimulate economic activity and encourage investment, which could further support the ongoing recovery.
Furthermore, the reduction in the policy rate is expected to have a positive impact on consumer spending. As borrowing costs decrease, households may find it more affordable to finance purchases of goods and services, leading to an increase in domestic demand. This, in turn, could contribute to higher economic growth in the coming months.
However, despite the positive outlook, the Bank of Ghana remains cautious about potential risks that could affect the inflation outlook. While the current forecast suggests a steady decline in inflation, external factors such as global oil prices, exchange rate fluctuations, and geopolitical uncertainties could pose challenges to the country’s economic stability.
The BoG has made it clear that it will continue to monitor these developments closely and take appropriate action if necessary to ensure that the disinflation process remains on track. In particular, the central bank is prepared to adjust its monetary policy stance if inflationary pressures re-emerge or if economic conditions deteriorate unexpectedly.
In conclusion, the 200-basis-point reduction in the Monetary Policy Rate to 27% marks a significant step by the Bank of Ghana in supporting economic recovery while maintaining a focus on inflation control. The decision reflects the improving macroeconomic environment, characterized by declining inflation and stronger growth. For borrowers, the rate cut offers much-needed relief, making credit more accessible and affordable. As the country continues to navigate its economic recovery, the BoG’s actions will play a crucial role in ensuring that inflation remains under control and that growth is sustained over the long term.
