Some economists are expressing contrasting views on the recent decision by the Monetary Policy Committee (MPC) of the Bank of Ghana (BoG) to cut the Policy Rate by 3 percentage points.
While one believes the decision is highly welcomed and a step in the right direction, others believe the move is aggressively premature.
The Monetary Policy Committee (MPC) of the Central Bank recently pulled a surprise on the markets, after its 125th MPC meeting by announcing a 300 basis points reduction in the policy rate, reducing the rate from 28% to 25%.
The move has been widely welcomed by the business groups such as GUTA and GNCCI, who are hailing the cut as a bold step towards stimulating economic growth and propelling investment.
These business associations are highly elated that the cut will eventually lead to a reduction in the average lending rate, hence reducing the cost of borrowing, which is a major difficulty for businesses in Ghana.
But economic analysts are expressing different opinions from the standpoint of the impact of the move on the general economy.
For Dr. Paul Appiah-Konadu, an economist at the Pentecost University, the cut is both timely and strategic.
According to him, Ghana is well on track to beat the Bank of Ghana’s year-end inflation target of 11.9%, with the latest figure at 13.7%, a sharp drop from 23% recorded in January. He believes inflation could even fall into single digits before the year ends if current trends hold.
With the government also showing signs of fiscal discipline in the first half of the year, Dr. Appiah-Konadu insists now is the right time to lower the cost of credit and spark private sector expansion. This decision, he also believes, will serve as an incentive to boost real sectors of the economy, such as agriculture and manufacturing, since investment in these sectors is credit-based.
“It is the right call to cut the policy rate by 300 basis points from 28% to 300% to make sure that we are getting the right investments to strategic sectors of the economy to propel growth and productivity. We are almost exceeding the inflation target. I think by next month’s inflation will drop below the 11.9 year-end targets set by the Bank of Ghana because we are now at 13.7,” Dr. Appiah Konadu told The High Street Journal in an interview.
He continued, “If you look at the speed at which we have dropped from 23% in January, I think we are going to end the year with a single-digit inflation, as it has been projected. So there are no fears, especially if governments continue to rationalise expenditures as they have done in the six months.”
But not all are clapping, as an economist and a senior lecturer at the University of Ghana Business School, Prof. Patrick Asuming, is rather concerned.
Prof. Patrick Asuming is more sceptical. He believes that a more measured approach would have been safer, giving policymakers room to assess the sustainability of the recent gains in inflation and exchange rate stability.
To him, the aggressive cut in the rate will spell doom for the country’s inflation since the fundamentals of the economy are not that resilient to warrant such a bold cut.
“I was surprised by the size of the cut, yes, the indicators are improving, inflation is coming down, the cedi is relatively stable, but the fundamentals are not yet solid enough to justify such a sharp drop. A more cautious approach would have allowed policymakers to observe whether these gains are sustainable,” Prof. Patrick Asuming argued.
The sharp divergence in opinion reflects broader uncertainty over the direction of Ghana’s macroeconomic recovery. While the policy rate cut is expected to ease lending conditions for businesses and households, it also risks overheating the economy or reversing recent disinflationary gains if underlying structural weaknesses persist.
For now, businesses may welcome cheaper credit, but analysts will be watching closely to see whether the bold move by the Bank of Ghana pays off, or if it ends up needing a quick U-turn.
