Bank of Ghana Shocks Markets with 28% Policy Rate Hike to Combat Inflation

Bank of Ghana Shocks Markets with 28% Policy Rate Hike to Combat Inflation——-The Bank of Ghana has raised its policy rate by 100 basis points (or 1%), moving it from 27% to 28%. This decision is aimed at controlling the persistent inflationary pressures in the country, which remain a concern despite recent slight improvements. As of February 2025, inflation stood at 23.1%, driven largely by high food prices and other non-food items.

The increase will however come as a surprise for many who were expecting a reduction because of recent declines in inflation and interest rates on treasury bills

Why the Policy Rate Increase?

The decision to raise the policy rate however comes as part of the Bank’s efforts to restore price stability in the economy. Inflation has been reducing in recement months but remained “stubbornly high”, fueled by several factors. Globally, the economic environment has become more uncertain due to rising interest rates, trade conflicts, and geopolitical tensions, the Governor Dr. Johnson Asiamah explained in a press statement. These global issues have affected investor confidence, softened business sentiment, and pushed up inflation expectations, especially in emerging markets like Ghana.

Locally, the economy has shown signs of recovery with GDP growth exceeding expectations in 2024. However, despite this growth, inflation remains sticky, particularly food inflation, which has been worsened by adverse weather conditions affecting crop yields. The Bank noted that although inflation has marginally eased, the current rate is still well above the target, requiring further policy tightening.

Additional Measures to Strengthen Policy

In addition to the policy rate increase, the Bank of Ghana announced several operational measures to enhance its efforts in controlling inflation and managing the liquidity in the financial system. These measures include:

1. Introducing a New 273-Day Instrument: The Bank will roll out a 273-day financial instrument, which will add to its existing tools for managing money supply and reducing inflation.
2. Stricter Monitoring of Banks’ Net Open Positions (NOPs): The Bank will intensify monitoring of banks to ensure they maintain the required balance between foreign exchange assets and liabilities, preventing excessive risk-taking in the foreign exchange market.
3. Reviewing the Cash Reserve Ratio (CRR): The Bank will reassess the structure of the CRR— the amount of money banks are required to hold as reserves. This review will help better manage liquidity conditions and ensure banks have enough funds to lend to businesses and individuals without causing further inflationary pressures.

The Global Impact

The global economic outlook has become more complicated in 2025. Tensions in global trade, especially with the recent tariff war, have contributed to rising inflation and uncertainty. Interest rates remain high in many parts of the world, and central banks such as the Federal Reserve, Bank of Japan, and Bank of England have kept their rates unchanged. Meanwhile, the European Central Bank has cut its policy rate to support growth in the Eurozone.

These developments are expected to have a spillover effect on the Ghanaian economy, with the possibility of lower demand for exports and increased financial market volatility. Despite these global challenges, the Bank of Ghana remains committed to maintaining economic stability.

Outlook

Although the domestic economy shows positive signs, including increased private sector credit growth and improved business confidence, the risks of inflation remain. The Bank’s decision to raise the policy rate and introduce additional measures is aimed at stabilizing prices and ensuring that the economy remains on track for sustained growth. The Bank of Ghana also noted that it will continue to closely monitor the situation and make further adjustments if necessary, with the possibility of easing the policy stance once inflation is firmly under control.