After the Monetary Policy Committee (MPC)’s decision to slash the Monetary Policy Rate (MPR) by 300 basis points, effectively reducing the rate from 28% to 25%, the immediate explanation of analysts was that interest rates are finally going to trend downwards.
But the question on the lips of many Ghanaians and businesses is, How does this policy shift affect me, my bank loan, or the price of goods at Makola?
To be able to fully answer this, we must first understand three interlinked pillars of Ghana’s credit or lending ecosystem.
These three pillars are: the Monetary Policy Rate, the Ghana Reference Rate, and the Average Lending Rate. Let’s think of them as a chain, and what happens at the top pulls or pushes the rest.
Monetary Policy Rate (MPR): BoG’s Steering Tool
The Monetary Policy Rate is set by the Bank of Ghana’s Monetary Policy Committee and acts as the primary tool for controlling inflation and managing liquidity. In simple terms, it’s one of the tools used to control money supply and circulation. If inflation is high, the BoG hikes the policy rate making it expensive for commercial banks to borrow money from the central bank. As a result, banks pass on this cost by raising interest rates on loans to businesses and consumers.
Higher lending rates discourage borrowing, reducing the amount of money circulating in the economy and hence control inflation.
For instance, in January 2025, inflation was 23%. By June, it had dropped to 13.7%, and with the central bank’s year-end target of 11.9% in sight, the Central Bank felt confident to cut the MPR.
The Ghana Reference Rate (GRR): The Industry’s Compass
It is worth noting that banks don’t lend money based on the MPR alone. They use the Ghana Reference Rate (GRR), a formula-based rate developed by the BoG that combines the MPR, 91-day Treasury bill rate, interbank rate, and a few other macroeconomic indicators like inflation and exchange rates.
It was introduced in April 2018 by the Bank of Ghana to bring transparency and uniformity to lending rates. This reference rate acts as the standard base across all banks, bringing transparency and predictability.
With the latest policy rate cut, the GRR, which is the industry standard base rate, is expected to be pulled down, although gradually.
The Average Lending Rate (ALR): What You Actually Pay
Now comes the most visible rate to the public, the Average Lending Rate. This is what borrowers actually pay on their loans, or what is normally called the interest paid on the loan.
The ALR is the combination of GRR and a bank-specific premium based on your risk profile. In other words, what a bank actually adds to the GRR to determine your lending rate is based on your creditworthiness or your risk profile, in addition to their profit margin.
As of mid-2025, the ALR remains stubbornly high, hovering close to 30%, despite earlier policy rate cuts. Why? Because banks are still cautious, concerned about default risks, exchange rate volatility, and the fragile recovery.
But with inflation easing and the cedi stabilising, economists expect commercial banks to gradually pass on the rate cut to borrowers.
What This Means for Ghanaians and Businesses
First of all, this is good news for businesses and individuals who have a floating-rate loan. A floating loan is a type of loan facility without a fixed interest rate, but the rate either goes up or down over time, depending on prevailing market conditions.
The cut in the MPR is expected to reduce the GRR component of the lending rate; hence, you may begin to see lower monthly interest payments in the coming months.
For prospective borrowers, this could be the window to secure cheaper credit.
In Ghana, access to affordable financing is the lifeblood of SMEs. Lower lending rates mean more room to invest in stock, machinery, or expansion. But banks will still look closely at your credit profile, so improving your books remains key. For large firms, commercial lending becomes cheaper. Coupled with stable inflation, companies can confidently plan long-term investments and support job creation.
The Caution
Not all economists are cheering. Some, like Prof. Patrick Asuming, caution that the sharp cut may be premature, warning that structural weaknesses still exist. Others, like Dr. Paul Appiah-Konadu, hail it as a bold and necessary move to kickstart growth and productivity.
The true test will lie in the transmission mechanism. Market watchers are waiting to see whether the lower MPR truly translates to lower GRR and ALR in the coming months.
The Bottom Line
The BoG’s rate cut is an indication that the cost of borrowing should start coming down. But for that to become a reality in your pocket or business ledger, banks must respond, and economic fundamentals must hold.
But the risk is that, without proper policies and directed investments, the cheaper cost of credit can throw inflation off gear, and the Central Bank will have no option but to reverse the MPR reduction.
