Ghana Cuts Interest Rates: A Smart Move or a Risky Gamble?

Ghana’s central bank recently lowered its benchmark interest rate substantially, a hefty 350 basis points down to 18%. This marks their third consecutive rate reduction. The driving force? Inflation seems to be cooling off rapidly, and the economic outlook appears to be improving.

Governor Johnson Asiama cited stronger real interest rate conditions and growing confidence in keeping inflation within the country’s target. Apparently, the high real interest rates gave them wiggle room to ease monetary policy, encouraging economic expansion. The bank anticipates stable inflation will stay within their target range well into 2026.

It’s quite the turnaround. Ghana’s inflation soared to over 54% in late 2022, a two-decade high. Now, it’s back within the Bank of Ghana’s target range, even hitting a four-year low recently. This move comes as Nigeria’s central bank decided to hold steady, maintaining its interest rate at 27%, even with some calls for a reduction due to their own inflation dip.

One economist from the Daily Trust believes Nigeria’s decision to hold was correct. He suggests that, given the recent cut, it’s wise to observe how it impacts the macro-fiscal environment. Policy changes require time before you see the effects. He also pointed to excess liquidity from fiscal policy continuing to put pressure on the macroeconomy, despite apparent collaboration between fiscal and monetary authorities. It is important to note that the impact of any rate adjustments takes time to materialise and needs to be assessed carefully.

On the other side of the coin, the Manufacturers Association of Nigeria (MAN) is urging further interest rate cuts. They feel the current rates, hovering between 30 and 37%, are crippling. They appreciate the pause but want borrowing costs lowered.

MAN contends these elevated rates impede production and diminish the sector’s competitiveness. They stress the need for more accessible credit, particularly for small and medium-sized manufacturers. Their perspective makes sense. High interest rates squeeze businesses, especially smaller ones, and choke off potential growth. It’s a perspective rooted in the practical realities businesses encounter daily.

The association also flagged persistent structural problems: poor infrastructure, exorbitant logistics, unreliable power, escalating energy costs, and insecurity. These all inflate production costs and underscore the complexity of stimulating growth solely through monetary policy.

MAN proposes strengthening policy coordination between the central bank and fiscal authorities, pushing for deeper reforms to unleash industrial potential. They also recommend introducing monetary tools to boost credit flow to the real sector, paired with increased government investment in infrastructure to enhance supply capacity.

They also advise close collaboration between the government and the CBN to stabilize the naira and manage risks of capital flight stemming from the recent MPC corridor adjustment. Complementary fiscal measures, industrial development, structural reforms in agriculture, manufacturing, and energy, and addressing inflationary pressures are also crucial.

So, what’s the bigger picture here? Ghana seems confident that it has inflation under control and is prioritizing economic growth. Nigeria, on the other hand, appears more cautious, perhaps concerned about potential inflationary pressures or other macroeconomic instabilities.

This divergence highlights the tricky balancing act central banks face. Do you prioritize taming inflation, even at the risk of stifling growth? Or do you focus on stimulating the economy, potentially reigniting inflationary flames?

Frankly, there’s no single right answer. Each country’s economic context is unique. What works for Ghana might not work for Nigeria, and vice versa. We have to see how it goes. It’s a calculated risk, and the next few quarters will reveal whether Ghana’s gamble pays off. My experience tells me it’s a delicate balancing act with no guarantees. Getting it right requires both astute economic management and a bit of luck.

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Keywords: Ghana interest rates, Nigeria interest rates, Ghana inflation, Nigeria inflation, economic growth, central bank, monetary policy, Manufacturers Association of Nigeria