Bank of Ghana explains 15.5% policy rate cut

The central bank has taken a major step toward easing monetary conditions after a year of sustained disinflation and strengthening macroeconomic fundamentals.

At its 128th Monetary Policy Committee (MPC) meeting held from January 26 to 28, 2026, the Bank of Ghana, by a majority decision, reduced the Monetary Policy Rate (MPR) by 250 basis points to 15.5 percent.

The decision reflects growing confidence that inflation is firmly under control, external buffers have improved significantly, and the economy is entering a phase where tighter monetary policy may no longer be necessary at the previous intensity.

The policy move comes against the backdrop of global economic resilience in 2025, with world growth remaining solid and projected at 3.3 percent in 2026. Inflation across major economies has eased closer to central bank targets, prompting several countries to begin loosening monetary policy.

The weakening of the US dollar and declining global yields have also improved financial conditions worldwide, creating a more favourable environment for emerging markets like Ghana.

However, MPC members cautioned that geopolitical tensions, tariff uncertainties, and oil price volatility remain key risks that could disrupt stability.

Domestically, the macroeconomic performance strengthened considerably through 2025, driven by coordinated fiscal and monetary discipline.

Headline inflation declined for 12 consecutive months, falling sharply from 23.8 percent in January 2025 to 5.4 percent in December.

Committee members attributed the sharp drop to exchange rate stability, improved supply conditions, tighter monetary policy, fiscal consolidation, and anchored inflation expectations.
Surveys among consumers, businesses, and financial market participants indicate that inflation expectations have continued to fall, reinforcing confidence in the disinflation trend.

The external sector recorded one of its strongest performances in recent years, supported largely by record gold export receipts and improved trade outcomes.

Ghana posted a current account surplus of US$9.1 billion at end-December 2025, compared with just US$1.5 billion the previous year.

This helped generate a balance of payments surplus of nearly US$4 billion and pushed gross international reserves up to US$13.8 billion, equivalent to 5.7 months of import cover.

The strengthened reserve position contributed to the robust performance of the cedi, which appreciated by over 40 percent against the US dollar by end-2025.

Economic growth also remained strong. Real GDP expanded by about 5.5 to 6 percent in 2025, driven largely by services and agriculture.

Key indicators such as the Composite Index of Economic Activity (CIEA), Purchasing Managers’ Index (PMI), and business and consumer confidence surveys all point to continued expansion into 2026.

Members noted that while activity is improving, the economy is still operating below full potential, creating room for policy easing without immediate inflationary pressure.

On the fiscal front, the consolidation efforts were largely on track. Although revenue mobilisation improved, collections fell slightly below target, while expenditures were contained within limits.

The result was a much-improved fiscal deficit and a stronger-than-expected primary balance surplus of 2.8 percent of GDP by November 2025, exceeding the initial target. Public debt metrics also improved faster than anticipated, prompting calls for a reassessment of debt sustainability projections going forward.

Within the banking sector, recovery continued gradually. Capital adequacy, profitability, and efficiency indicators improved, while the non-performing loan (NPL) ratio declined from 21.8 percent to 18.9 percent.

However, private sector credit growth remains weak, largely due to high lending rates, prompting several MPC members to argue that reducing the policy rate is necessary to stimulate borrowing, investment, and broader economic activity.

The majority of committee members supported a 250 basis point cut, stressing that real interest rates remain excessively high given the sharp fall in inflation. With inflation forecast around 7.5 percent for 2026, members argued that maintaining the previous policy rate of 18 percent would keep real rates elevated by international standards, potentially constraining growth and delaying credit recovery.

They also noted that downside risks—such as expected reductions in transport fares, VAT adjustments, lower fuel prices, and the abolition of the COVID-19 Health Recovery Levy—could further support lower inflation.

Two members, however, voted for a deeper cut of 300 basis points to 15.0 percent, citing the wide real interest rate gap of over 12 percent, strong reserve buffers, and inflation risks tilted more to the downside than the upside.

Nonetheless, the committee agreed that caution remains necessary due to potential utility tariff adjustments, commodity price volatility, geopolitical shocks, and external debt servicing pressures expected in 2026.