Ghana’s inflation rate has experienced a dramatic turnaround, from 37.1% in September 2023 to a 14 %-month low of 35.2% in October.
The last two years for been economically tumultuous. Regarded as one of its worst economic periods in over two decades, Ghanaians, since 2022, have been subjected to varying levels of financial stress as a result of the country’s economic shortcomings.
The Bank of Ghana (BoG) has maintained its benchmark policy rate at 15% in a bid to curb inflation, while also raising the cash reserve ratio (CRR) to 15% from 13%. The decision was made at the BoG's Monetary Policy Committee (MPC) meeting on November 28, 2023.
The policy rate is the interest rate that the BoG charges commercial banks to borrow money. By keeping the policy rate at 15%, the BoG is signaling to banks that it is unwilling to further stimulate the economy. This is because a higher policy rate makes it more expensive for businesses and consumers to borrow money, which can dampen economic activity.
The CRR, on the other hand, is the percentage of customer deposits that banks are required to hold in reserve with the BoG. By raising the CRR, the BoG is reducing the amount of money that banks have available to lend. This can also help to cool the pace of credit growth and dampen inflationary pressures.
The BoG said that the CRR increase is intended to strengthen liquidity management and improve financial stability. The higher CRR will require banks to hold more reserves with the BoG, reducing the amount of money they have available to lend. This is expected to help cool the pace of credit growth and dampen inflationary pressures.
The combination of these two monetary policy tools is intended to create a more restrictive monetary policy environment, which could help to slow economic growth and bring down inflation if carefully monitored.
The BoG should be mindful of the fact that a very restrictive monetary policy could risk tipping the economy into a recession, so the BoG will need to carefully monitor economic conditions and adjust its policy stance as needed.
The MPC also noted that the global economic outlook remains uncertain, with risks to the growth outlook from the war in Ukraine, rising commodity prices, and tightening global financial conditions. However, the BoG said that the domestic economy is showing resilience, with strong growth in the non-oil sector and a recovery in the services sector.