By Emmanuel DANKWAH
The upcoming Monetary Policy Committee (MPC) meeting occurs against a backdrop of encouraging developments for the Ghanaian economy.
The recent appreciation of the Ghana Cedi against the major currencies especially the US Dollar, the notable dip in inflation from 22.4percent in March to 21.2percent in April, and the positive upgrade from rating agencies paint a picture of cautious optimism.
Juxtaposing these domestic improvements with the insights from the IMF’s World Economic Outlook (WEO) released in April 2025, a nuanced perspective on the future monetary policy rate and its broader implications emerges.
Expectation of the Monetary Policy Rate
Considering the confluence of factors, the MPC faces a delicate balancing act. The decline in inflation provides a strong argument for easing monetary policy to further stimulate economic activity.
A lower policy rate would reduce borrowing costs across the economy. Furthermore, the strengthening Cedi mitigates some of the imported inflation pressures, offering additional room for a rate cut.
Dr. Johnson Pandit Asiama, Governor of the Bank of Ghana (BoG)
However, the MPC will likely remain cautious. While inflation is trending downwards, it remains significantly above the central bank’s target band.
The WEO (April 2025) emphasizes a critical juncture amid policy shifts globally, suggesting potential external volatilities that could impact Ghana’s economy. A premature aggressive rate cut could risk a reversal of the Cedi’s gains and reignite inflationary pressures, especially if global conditions become less favourable.
My expectation is that the MPC will likely opt for a modest reduction in the monetary policy rate, in the range of 100 to 200 basis points.
This cautious approach would acknowledge the positive trends while signaling a commitment to sustained disinflation and macroeconomic stability.
A larger cut might be perceived as overly aggressive and could trigger concerns about future inflation and currency stability.
What are the possible implications
Implications for the banking industry
A reduction in the monetary policy rate will have multifaceted implications for the banking industry:
- Reduced Lending Rates: Banks will likely lower their lending rates in response to a lower policy rate, potentially boosting loan demand from businesses and individuals. This could lead to increased credit growth.
- Impact on Net Interest Margins (NIMs): Lower lending rates, coupled with potentially slower adjustments in deposit rates, could compress banks’ net interest margins, a key measure of profitability. Banks may need to explore alternative revenue streams or improve operational efficiencies to mitigate this impact.
- Increased Loan Volumes: The lower cost of borrowing could stimulate demand for loans across various sectors, potentially increasing the overall loan portfolio of banks. However, banks will need to carefully manage credit risk in this environment to curtail non-performing loans (NPL).
- Valuation of Fixed-Income Assets: Banks holding government securities and other fixed-income assets might see a short-term appreciation in the value of these holdings as yields fall in response to the policy rate cut.
- Liquidity Management: A lower policy rate could ease liquidity conditions in the banking system, making it cheaper for banks to access funds.
Implications for private sector businesses
A lower monetary policy rate is generally positive for private sector businesses:
- Reduced Borrowing Costs: Lower interest rates translate to cheaper financing for working capital, expansion projects, and investments in new technologies. This can improve profitability and encourage business growth.
- Increased Investment: As the cost of capital decreases, businesses may find it more attractive to invest in expanding their operations, leading to job creation and increased economic activity.
- Enhanced Competitiveness: Lower borrowing costs can improve the competitiveness of Ghanaian businesses, both domestically and internationally.
- Potential for Increased Demand: Lower interest rates can stimulate aggregate demand in the economy, benefiting businesses through increased sales and revenue.
Implications for International Investors
The implications for international investors are more nuanced and depend on the overall global economic context and Ghana’s risk profile:
- Attractiveness of Cedi-Denominated Assets: A stable and appreciating Cedi, coupled with relatively attractive (albeit potentially lower) interest rates, could still make Cedi-denominated assets appealing to international investors seeking higher yields than those available in developed economies.
- Impact on Portfolio Flows: A cautious rate cut, signaling prudent monetary policy, could be viewed favourably by international investors, potentially leading to increased portfolio inflows into Ghanaian bonds and equities. However, an aggressive rate cut could raise concerns about future inflation and currency stability, potentially deterring investment.
- Foreign Direct Investment (FDI): Lower borrowing costs for local businesses could indirectly attract FDI as international companies may find it more attractive to partner with or invest in a growing and financially sound domestic private sector.
- Sovereign Risk Perception: The recent sovereign rating upgrade is a significant positive. A well-managed monetary policy response that supports economic stability will reinforce this positive perception among international investors.
Impact on the general economy
The anticipated modest reduction in the monetary policy rate is likely to have the following effects on the general economy:
- Stimulated Economic Growth: Lower borrowing costs should encourage investment and consumption, leading to a gradual acceleration in economic growth.
- Controlled Inflation: The cautious approach to rate reduction aims to balance growth with maintaining downward pressure on inflation. The recent appreciation of the Cedi will also contribute to mitigating imported inflation.
- Potential for Job Creation: Increased business investment and economic activity are likely to lead to the creation of new job opportunities.
- Impact on Savings: Lower interest rates on savings accounts might reduce the incentive to save, potentially encouraging more consumption and investment.
- Overall Stability: A well-calibrated monetary policy response, in conjunction with fiscal discipline and structural reforms, can contribute to overall macroeconomic stability and build confidence in the Ghanaian economy. The WEO (April 2025) highlights the importance of structural reforms to enhance growth potential, which will be crucial in amplifying the positive effects of monetary policy easing.
Sustaining the economic gains
To maintain the current positive economic momentum, a multi-pronged approach is essential:
- Prudent Monetary Policy: The MPC should continue to adopt a data-driven and cautious approach to monetary policy, ensuring that any further easing is well-calibrated to anchor inflation expectations and maintain currency stability. Clear communication of policy decisions and rationale is crucial.
- Fiscal Consolidation: The government must remain committed to fiscal discipline to reduce the debt burden and create fiscal space for growth-enhancing expenditures. This will complement the efforts of monetary policy in fostering macroeconomic stability.
- Structural Reforms: As emphasized in the WEO (April 2025), sustained economic growth requires addressing structural bottlenecks. This includes improving the ease of doing business, investing in infrastructure, strengthening institutions, and promoting diversification of the economy.
- Attracting Long-Term Investment: Efforts should be intensified to attract both domestic and foreign long-term investments in key sectors of the economy. A stable macroeconomic environment and a conducive business climate are critical for this.
- Effective Management of External Shocks: Given the interconnectedness of the global economy, proactive measures should be taken to build resilience against potential external shocks, including commodity price volatility and changes in global financial conditions. International cooperation, as highlighted in the WEO, remains vital in this regard.
By carefully navigating the current economic landscape with prudent policies and a focus on long-term structural reforms, Ghana can solidify the recent gains and pave the way for sustainable and inclusive economic growth. The upcoming MPC meeting presents a crucial opportunity to signal a commitment to this path.
>>>the writer is a Financial Economist and Data Analyst. His areas of interest include financial market, Ethics, Sustainability, Financial Literacy, AI and data analytics. He can be reached via [email protected]
