Lowering the Bank of Ghana’s policy interest rate alone will not significantly boost economic growth. This is the central argument made by Dr. Sajid Chaudhry, an economist and International Fellow of the Institute of Economic Affairs. He stated that commercial banks must also reduce their own lending rates for the economy to feel the benefits. Without these cheaper loans for businesses, any reduction in the central bank’s benchmark rate will have a limited effect on economic activity.
Dr. Chaudhry explained that for monetary easing, which is when a central bank tries to stimulate the economy by making it cheaper to borrow money, to work in Ghana, it must lead to lower borrowing costs for companies. It also needs to encourage more private businesses to take out loans to expand their operations. He noted that a deep dive into data from 2002 until 2024 revealed a clear pattern. When lending rates went down, Gross Domestic Product, which measures the total value of everything a country produces, tended to go up. Conversely, high interest rates and high inflation, which is when prices rise rapidly, have historically harmed economic performance.
This issue is part of a larger economic challenge in Ghana. The Bank of Ghana has been working to control inflation and has recently lowered its policy rate. However, the impact of these moves is being hampered by what economists call 'slow transmission.' This means that changes made by the central bank are not quickly passed on to ordinary borrowers. Dr. Chaudhry pointed out that commercial banks have been slow to lower their lending rates. They maintain high profit margins on loans, known as net interest margins. This is often because they are dealing with a high number of non-performing loans, which are loans that borrowers are struggling to repay. Instability in the country’s currency exchange rate and general economic uncertainty also play a role.
Dr. Chaudhry commended the Bank of Ghana for its efforts in lowering rates as inflation has subsided. However, he stressed that policy changes need to be more comprehensive. "Policy should therefore combine monetary easing with measures that strengthen credit intermediation and bank balance sheets," he stated. Credit intermediation is the process through which banks channel funds from savers to borrowers. He suggests the central bank could use regulatory tools to encourage banks to pass on rate cuts more rapidly to borrowers. He also proposed that banks should consider improving deposit rates when monetary policy is tightened, meaning when the central bank raises rates to cool the economy.
To truly make monetary policy effective, Dr. Chaudhry urged commercial banks to improve their systems for checking if businesses can repay loans and for monitoring existing loans. He also advised businesses to focus on becoming more productive and ensuring they repay their debts on time. "When banks have high levels of bad loans, they are less willing and able to pass lower policy rates through to cheaper lending, which weakens the impact of monetary easing on growth," he explained. He also called on the government to ensure stability in the economy by keeping the exchange rate steady, controlling inflation, managing public spending wisely, and maintaining a strong banking sector. These factors are all crucial for supporting lower lending rates and fostering economic growth.