An economist at the University of Ghana Business School, Prof Patrick Asuming says the latest decision of the Monetary Policy Committee of the Bank of Ghana to increase the policy rate is a balancing act between managing inflationary pressures and supporting business growth.
Prof. Asuming maintains that a critical analysis of the decision reveals that the committee was torn between maintaining macroeconomic stability and supporting growth by cutting the policy rate.
The Committee, at the end of its 123rd meeting by majority decision, raised the policy rate by 100 basis points from 27% to 28%. While the committee sees the decision as a necessary step to curb excess liquidity in the banking system, it has also tempered business expectations of a cut in the rate to propel a swift decline in lending rates.
Prof. Asuming explained that although businesses were anticipating a reduction in lending rates following the downward trend in treasury bill rates, the central bank appears to believe that such a move is premature.
In addition, the economist believes it is the view of the Bank of Ghana that there is excess liquidity in the system, and hence, a reduction in the policy rate might heighten inflationary pressures and disrupt the fairly stable currency.
“Hearing that there is more liquidity in the system than expected, especially since there was a liquidity injection last year, then perhaps it’s not too surprising that they decided to raise the policy rate. There is a clear attempt to improve the liquidity management within the banking system. It’s that the MPC is of the view that there is too much liquidity in the system so that is something that they are going to crack down.” Prof. Asuming explained.
With inflation still a key concern, the Bank of Ghana seems to be prioritizing macroeconomic stability over immediate lending rate relief.
Prof. Asuming suggests that the central bank is likely betting on a more stable cedi and controlled inflation as preferable trade-offs to a rapid reduction in interest rates for businesses.
He said. “if this rake hike helps to stabilize the cedi, since the cedi’s instability is one of the major headaches for businesses, in that sense, it’s a balancing act. On one hand, yes, we would have wished that lending rates would have come down faster, but probably they will think that if the cedi is more stable. inflation also becomes stable, and the macroeconomic environment improves; they will probably take that over some rate reduction.”
This latest move underscores the Bank of Ghana’s cautious approach in navigating the complex dynamics of monetary policy.
While businesses and consumers may feel the pinch of sustained high lending rates, policymakers are betting that a stronger macroeconomic foundation will yield long-term benefits.
