Questions are mounting over whether the Bank of Ghana (BoG) is sending mixed signals to the market, as it simultaneously cuts interest rates while spending billions to mop up liquidity.
But according to Prof. Dennis Nsafoah, Assistant Professor of Economics at Niagara University, New York, and a member of the Research Committee at Tesah Capital, what appears contradictory is in fact a deliberate and coordinated strategy to stabilise the economy while supporting recovery.
At the centre of the debate is a policy mix that, on the surface, seems to pull in opposite directions—lowering the cost of borrowing while tightening the amount of money circulating in the system.
The apparent contradiction
The BoG’s decision to reduce the policy rate from 15.5 percent to 14 percent continues a steady easing cycle. At the same time, the central bank has intensified liquidity absorption, incurring about GH₵17 billion in 2025 alone to drain excess cash from the system.
Traditionally, rate cuts are associated with injecting liquidity to stimulate growth, while sterilisation removes liquidity—often at a fiscal cost. Doing both simultaneously has therefore raised questions about policy coherence.
What the data reveals
Prof. Nsafoah argues that the data does not point to confusion, but to two distinct trends unfolding in parallel.
Interest rates across the economy have declined sharply, with the interbank rate falling from above 27 percent in early 2025 to about 12.6 percent by February 2026. Treasury bill yields and lending rates have followed the same trajectory, while the Ghana Reference Rate has dropped significantly from over 32 percent in 2024 to about 11.7 percent. This confirms that policy easing is working through the interest rate channel, lowering the cost of credit and improving financial conditions.
At the same time, liquidity conditions have tightened. Bank reserves held at the central bank have declined from over GH₵74 billion to about GH₵60.8 billion within the same period, while growth in broad money supply has slowed markedly. This indicates sustained efforts to absorb excess liquidity from the system.
In effect, while borrowing is becoming cheaper, the overall volume of cash circulating in the system is being restrained.
Two channels, one objective
According to Prof. Nsafoah, the seeming contradiction disappears when monetary policy is viewed through its different transmission channels.
On one hand, the reduction in the policy rate reflects changing macroeconomic conditions, particularly the sharp decline in inflation to about 3.3 percent. Maintaining high rates under such conditions would unnecessarily constrain credit and investment. Lower rates are therefore intended to support private sector activity and sustain the recovery process.
On the other hand, the central bank is dealing with a legacy problem, excess liquidity accumulated during the 2022–2023 crisis. In Ghana’s context, this poses a specific risk: surplus cedi liquidity often finds its way into the foreign exchange market, increasing demand for dollars and putting pressure on the cedi. That pressure can quickly translate into renewed inflation.
By withdrawing liquidity, the BoG is effectively limiting speculative demand for foreign exchange and reinforcing currency stability, even as it eases borrowing conditions.
Why both tools matter
Prof. Nsafoah stresses that interest rate policy and liquidity management are not interchangeable tools. The policy rate determines the price of short-term funds, while liquidity operations influence how money flows through the financial system, particularly in sensitive markets such as foreign exchange.
If the central bank were to abandon both approaches, the economy could face an undesirable mix of persistently high borrowing costs alongside renewed exchange rate instability driven by excess liquidity. In such a scenario, monetary policy would struggle to transmit effectively, undermining both growth and stability.
Global parallels
The Bank of Ghana’s approach is not without precedent. Prof. Nsafoah points to the United States, where the Federal Reserve adopted a similar strategy as inflation eased.
Between 2024 and 2025, the Fed cut its policy rate significantly while simultaneously shrinking its balance sheet through quantitative tightening. This dual approach, lowering the cost of borrowing while reducing excess liquidity built up during earlier stimulus was widely interpreted as a normalisation process rather than a contradiction.
Ghana’s central bank, he argues, is applying a comparable logic, tailored to local economic realities.
A delicate balancing act
Ultimately, the BoG’s current policy stance reflects a transition from crisis stabilisation to recovery. Lower interest rates are intended to revive credit and investment, while liquidity tightening protects the cedi and guards against a resurgence of inflation.
For Prof. Nsafoah, the key takeaway is that the central bank is not working at cross purposes, but carefully calibrating multiple tools to achieve a single objective, which is macroeconomic stability.
What appears to be a contradiction is, in reality, a balancing act, one that underscores the complexity of managing an economy emerging from crisis while trying to sustain growth.
