News Guide Africa

Tag: Interest rate

  • BoG’s sharp benchmark interest rate cut to lower lending, deposit rates

    BoG’s sharp benchmark interest rate cut to lower lending, deposit rates

    Ghana’s banking sector is preparing to lower both lending and deposit rates after the Bank of Ghana delivered a second consecutive large easing step in 2025, but bankers warn that the transmission to customers rates will be uneven and may take time.

    The central bank cut its Monetary Policy Rate by 350 basis points to 21.5% on September 17, 2025, following an earlier record 300 basis points reduction on July 30, 2025. Taken together the two moves have lowered the policy rate by 650 basis points over two consecutive Monetary Policy Committee meetings a dramatic shift from the tight monetary stance that prevailed through 2024 and early 2025.

    Bank chiefs and industry groups say the cuts should, in time, feed through into lower bank reference rates and commercial lending alleviating the cost burden on businesses and households.

    John Awuah, Chief executive of the Ghana Association of Banks told local media ahead of the previous MPC decision made in July that bank expected a substantial easing and that “a material cut in the policy rate should pave the way for significant reductions in lending rates,” a sentiment banker have reiterated after the September cut.

    But several constraints will temper how quickly and how far headline rates fall. Banks cite legacy funding costs, the need to rebuild balance sheet cushions after recent financial sector stress, and high yields on outstanding 180 day and 364-day treasury bills issued and invested in before the sharp fall in rates over the past few months, as reasons for cautious phased adjustments to customer pricing. Industry data show that average lending rates have already been trending down from about 31.6% as at the start of 2025 to roughly 27.0% by June and 24.15% by August– suggesting transmission is underway but incomplete.

    “Policy easing creates room for banks to reduce rates, but the pace depends on deposits and the relative attractiveness of government paper” said an economist who follows Ghana’s financial sector. “Banks will seek to protect margins and remain capital compliant while they reprice. “

    That view echoes public comments from the BoG which signaled confidence in continued disinflation while urging banks to support the recovery by moderating lending rates. Indeed, the BoG Governor, Dr Johnson Asiama, last week said the central bank now expects inflation to fall to within its medium-term target of between 6% and 10% before the end of the year.
    On the deposit side, bankers say retail rates will fall more slowly. Retail deposit rates are sticky; many banks rely on older, higher cost term deposits placed during earlier, higher-rate months, and customer bahaviour especially demand for real returns in an economy recovering from macro-stress – will influence how quickly institutions are willing to lower advertised savings rates.

    “We expect a phased approach; wholesale and short-term corporate pricing will adjust first, retail rates later,” one senior bank executive said on condition of anonymity.

    Analysts point to several indicators to watch for the speed of pass through. The BOG’s short term reference yields and interbank rates are key; a sustained decline in market reference rates typically forces banks to trim their reference and minimum lending rates. So far market reference rates have fallen but remain higher than pre-crisis norms, leaving space for further compression.

    Rating agency commentary also matters; Fitch recently noted that most Ghanaian banks were on track to be capital compliant once regulatory forbearance ends, a condition that should bolster confidence but also incentivize prudence on interest margin compression.

    How banks translate a lower MPR into cheaper credit will also depend on the risk outlook. Non – Performing Loans (NPLs) the mix of corporate versus retail loan book, and foreign exchange linked exposures influence banks willingness to cut rates.

    “Lenders with stronger deposit franchises and lower NPLs will be the first movers” said Leslie Dwight Mensah, an economist with the Institute of Fiscal Studies in Accra. “For others, capital preservation will remain a priority.”

    Market watchers expect the initial impact to show in reference rate announcements and in some wholesale lending lines within weeks, with broad retail mortgage small and medium sized enterprises and consumer lending repricing over the coming months. For businesses that rely on short term working capital, even modest cuts in reference rates could meaningfully reduce finance costs; for savers, the effects will be muted until banks unwind higher cost deposit stock. Analysts stress the final effect on bank profitability will be an outcome of the speed of asset repricing versus the rollback of deposit costs.

    Regulators and policymakers appear to be nudging the banks towards faster transmission. The BoG’s statement accompanying the September rate cut decision emphasized monitoring progress on inflation and signaled continued vigilance, while industry bodies have publicly encouraged banks to translate easier policy into lower lending rates to support growth.
    Whether market level transmission lives up to those calls depends on banks’ balance sheet dynamics and competition for deposits.

    By Toma Imirhe

     

  • The real economy at the heart of interest rate choices – BoG’s Abradu-Otoo explains

    The real economy at the heart of interest rate choices – BoG’s Abradu-Otoo explains

    The Director of Research at the Bank of Ghana, Dr Philip Abradu-Otoo, has stressed that decisions on Ghana’s key policy rate are anchored in the performance of the real economy, not just abstract financial models.

    “The things that go into arriving at a decision as to where to put the key policy rate of a central bank involve many factors. The committee in arriving at this decision discusses issues about the real sector of the economy,” he said on Joy News’ PM Express Business Edition.

    He explained that the real economy means taking account of how both businesses and consumers are coping with ongoing adjustments.

    “So, when we talk about the real sector of the economy, we are talking about how businesses are faring. We’re talking about how consumers are also faring, and whether consumers are feeling the pinch of economic adjustment that is taking place, whether spending in the economy is at a level that is consistent with what the fiscal authorities, for instance, might expect, because the more we spend, the more the fiscal authorities are also able to extract revenues for development purposes.”

    According to him, the Bank of Ghana relies on a broad set of data to measure the pulse of the real sector.

    “The Bank of Ghana has developed its own way of gauging how the real sector of the economy is performing, and periodically, the Ghana Statistical Service also comes out with figures on how the overall economy is performing.

    “So, when we talk about the real sector of the economy, it’s about what you and I are doing in the economy. It’s about what businesses are doing in the economy.

    “And we try to gauge the tempo of all these activities in the economy, imports, exports, all these things fit under the real sector of the economy.”

    Inflation, he noted, remains a central part of the analysis.

    “We try to look at what is going on with respect to prices, inflation, you call it inflation. And then we try to even look at what the forecast of all these indicators looks like, especially for inflation, and are we getting close to our target?”

    Dr Abradu-Otoo said the Bank also examines the health of the financial system itself.

    “We also look at even the banking sector, are they positioned in a way to help support growth in the economy, because the main job of the banks in the country is to support growth. Okay, so are banks well-positioned to deliver growth in the economy?”

    He stressed that risks are always factored into the final decision.

    “Having done that, we then look at the risks surrounding all these things, and then we try to put all these things together in a framework to decide as to whether going forward, we should be confident about ourselves, and whether going forward we think that the risks are very minimal, and whether we can then reposition our key policy rate to deliver continued growth sustainably. I think the keyword is sustainable manner.”

    By Abubakar Ibrahim

  • Banks reducing interest rate amidst monetary policy rate tightening 

    By Adnan Adams Mohammed

     

     

    The Bank of Ghana’s Monetary Policy Committee (MPC) in the past two months tightened the monetary policy rate to 28 percent for the months of March and April. 

     

    The central bank’s Governor, Dr Johnson Asiama, last week, announced that the benchmark MPR was being maintained at 28%, for the next two months. This is the rate it had been hiked to at the end of March when the MPC voted for a 100 basis point increase from the previous 27% it had inherited from the previous BoG administration.

     

    The position of MPC to keep the MPR was expected by most monetary economists despite some positive adjustments in the country’s macroeconomic indicators. 

    While borrowers will be disappointed that the recent strong gains in Ghana’s key performance indicators did not translate into a cut in the benchmark MPR, Dr Asiama correctly pointed out that, the restoration of macroeconomic stability is already driving down interest rates across board, despite the central bank’s continued tight monetary policy to squeeze out stubbornly high headline inflation, the Ghana Reference Rate – which is set by the Ghana Association of Banks and serves as the base lending rate for the industry – fell from 29.31% at the start of this year, to 23.99% by April. 

     

    Similarly, the average lending rate charged by banks, fell from 30.25% to 27.40% over the same period. This is despite the 100 basis points increase in the benchmark  MPR in late March. 

     

    Pending the release of data for May, it is safe to assume that this trend of falling interest rates is continuing. Between January and April, the 91 day treasury bill rate fell much more sharply than lending rates, from 27.73% to 15.47%, while the 182 day bill declined from 28.43% to 16.23% and the 264 day bill fell from 29.95% to 18.62%. Instructively, at the most recent weekly tender of government treasury bills – concluded at the same time the MPC was deciding to retain the MPR at 28% – the 91 treasury bill interest rate reached a new low of 14.93%, with the 182 day bill rate having fallen to 15.55% and the 364 day bill having declined to 16.00%.

     

    Based on interest rate trends over the previous couple of months this suggests that lending rates are likely to have fallen further during current month of May and look set to continue declining over the coming weeks, despite the MPR having been retained at 28%.

     

    It is instructive that despite the ongoing decline in interest rates, lending rates remain positive in real, inflation adjusted terms, and the negative gap between treasury bill rates and inflation, although inordinate, looks set to dissipate as inflation edges lower towards the central bank’s target for end of 2025  of 11.9%.

     

    Meanwhile, explaining the decision to maintain the MPR at 28%, Dr Asiama  noted that “The latest forecast points to continued easing of inflationary pressures on the back of tight monetary policy stance, exchange rate stability, and fiscal consolidation. Inflation is expected to ease faster towards the medium-term target in the first quarter of 2026 as opposed to the second quarter as earlier envisaged, barring unanticipated shocks.

     

    “Despite these positive developments, the Committee observed that the current level of inflation remains high relative to the medium-term target and will require maintaining the tight stance to reinforce the disinflation process. Under the circumstances, the Committee, by a unanimous decision, maintained the policy rate at 28.0%.”

     

    The BoG now expects inflation to end the year at 11.9%, down from 21.4% currently, and fall further into its medium term target range of between 6% and 10% by the first quarter of 2026.

  • BoG raises benchmark interest rate to 28% …even as treasury bill rates hit two year low of less than 17%

    BoG raises interest rate to 28% to tackle inflation.

    By Toma Imirhe

    Last week the Bank of Ghana announced a 100 basis points hike in its benchmark Monetary Policy Rate following the majority decision made by its newly reconstituted Monetary Policy Committee, led by new central bank Governor Dr Johnson Asiama, which had met for three days earlier in the week.  This takes the MPR up to 28%, from the 27%, at which it had been held since September last year, itself the result of a sharp 200 basis points cut from the erstwhile 29%.

    The MPR is the rate at which the BoG would lend short term to commercial banks to smooth over any temporary liquidity challenges they might face. Although, banks have preferred to lend to each other on the interbank market rather than resort to the central bank since the banking sector melt down at the turn of the decade, the MPR still serves as their guide as to where the BoG wants interest rates to go.

    Therefore last week’s hike in the MPR is expected to result in a roughly commensurate increase in rates charged by most of Ghana’s commercial banks. The interbank weighted average interest rate, at which most banks can obtain short term liquidity, roughly mirrors the MPR, averaging 27.06% in January and 27.04% in February.

    The Ghana Reference Rate, which serves effectively as the base lending rate for all commercial banks – being computed by them in collaboration with the BoG – has been a little higher at 29.72% in January and 29.96% in February.  Actual average lending rates have of course been higher still – although only slightly so –  at 30.07% in January and 30.12% in February.

    The increase in the MPR aims at slightly tightening monetary policy to squeeze out the excess liquidity which was created largely by government’s fiscal deficit overrun in 2024, caused by expenditure exceeding target in the run up to the December general elections. The fiscal deficit, on commitment basis was 7.9%, twice the 3.8% target, and the BoG sees the resultant liquidity injection as a key reason why the downward trend in consumer inflation from a peak of  54.1% in December 2022, has stalled at about 23% for several months now.

    But the imminently increased interest rate regime for the commercial banking industry may cause difficulties for government itself. Stringent fiscal discipline and resultant fiscal consolidation by the President Mahama administration since it assumed office in early January has enabled it to reject relatively high offers for its treasury bill issuances, thereby forcing down yields on short term treasuries. Indeed, on the same day that the BoG announced the increase in the MPR to 28%, last week’s treasury auctions results were showing that the 91 day treasury bill rate had fallen to 15.74%, barely half of the 28.37% offered in January. Similarly the 182 day treasury bill rate has fallen to 16.93% down from January’s 28.98% and the 364 day treasury note rate has fallen to 18.85%, down from 30.26% in January.

    But with headline consumer price inflation still at 23.1%, this means treasury instruments are offering negative interest rates which is generating declining attraction for financial institutions and other savvy investors. Last week, after weeks of oversubscription, the effects of now negative interest rates on treasury bills showed up, as government failed to attract its targeted subscription of GHc5,644 million, as only GHc4,708.82 million was tendered.

    However government stuck to its game plan, accepting only GHc4,113.20 million and rejecting the highest bids which went as high as 16%  for 91 day bills and 17.3% for 182 day bills.

    BoG Governor Dr Asiama has explained that although monetary and fiscal policy should work in tandem, right now government’s primary objective is to minimize its debt servicing costs which means minimizing its treasury instrument yields, while the central bank is focused on squeezing out inflationary pressures by tightening monetary policy.

    There are indeed factors favouring government’s success in issuing treasury bills with negative interest rates over the coming weeks. One is that the banks are offering a mere 10.5% on retail sized fixed deposits and virtually nothing on current accounts which account for most of their deposits; and investors have little choice, with the longer term domestic bond market still closed and the non-bank deposit takers who offer higher rates on fixed deposits lacking the confidence of most depositors.    

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    EDITORIAL

    Monetary tightening confirms the plan to restore economic stability first

    Last week, the Bank of Ghana laid any lingering doubts over whether expansionary supply side economics or demand management driven economics was going to guide the President John Dramani Mahama administration during the early stages of its tenure in office.  By increasing the benchmark Monetary Policy Rate by 100 basis points to 28%, it is now clear that the restoration of macro-economic stability is the immediate target, with the promised expansionary policy stance to follow after this has been achieved.

    The interest rate hike follows on from the new government’s unusual – but prudent – decision to cut public expenditure this year in a bid to bring the fiscal deficit down to 4.1% of Gross Domestic Product, from the well above target 7.9% outcome in 2024. But the rate hike has surprised many who thought that the central bank would follow the lead of government itself which has used financial discipline to achieve rapid fiscal consolidation which in turn has forced treasury bill rates down to the lowest levels since 2022.  

    The MPR increase last week will expectedly bring about slight increases in interest rates charged by financial intermediation companies to borrowers, although it should be noted that the sharp drop in treasury bill rates since the new government assumed office had not been accompanied by a similar drop in rates charged by commercial lenders, since inflation has stubbornly stuck at just over 23%. Rather the drop in treasury bills has simply been the result of government’s successful strategy of cutting back on its short term treasury issuances and its rejection of the relatively high bids that have been made for them, in order to cut its interest costs.

    The underlying problem behind still high commercial rates then remains relatively high inflation and this is what the BoG, as an inflation targeting central bank, has set its sights on.

    To be sure its monetary policy stance is on solid ground. Monetary tightening tends to curb inflation but at the cost of the economic growth rate. But Ghana’s growth rate is sturdier than expected, at 5.7% in 2024, exceeding both the target of 4.0% and 2023’s performance of 3.6%. Furthermore there are early signs that it will remain strong this year. The BoG’s real sector indicators point to a sustained improvement in economic activity, amid significantly improved business and consumer sentiments.

    Besides, government has conservatively targeted a 4% growth rate for 2025 in anticipation of the economic costs of fiscal consolidation and a tightened monetary stance to bring inflation down drastically, in order to set the foundation for sustainable expansionary economic policy.

    The first stage of the Mahama administration’s game plan is to restore economic stability, epitomized by low inflation and fiscal deficit, and exchange rate stability. The Bank of Ghana has obviously read the script.