BoG Governor calls for monetary policy to have greater impact on Ghana’s real economy

The Bank of Ghana (BoG) is reshaping its monetary-policy operations to ensure decisions taken by the central bank are reflected more quickly in borrowing costs, credit availability and investment across Ghana’s economy.

Governor Dr Johnson Pandit Asiama said monetary policy should be judged not only by decisions made by the Monetary Policy Committee (MPC), but also by the effect those decisions have on businesses, farmers, traders and households.

“A policy decision can influence the cost of borrowing for a small business, the purchasing power of a household, the ability of a farmer to finance the next planting season, or the capacity of a petty trader to restock his or her business,” he said.

“It can affect investment, employment, savings and, ultimately, the welfare of citizens.”

The comments come as BoG revises the way its policy decisions are transmitted through financial markets. The changes include the reintroduction of the 14-day BoG bill as the central bank’s main instrument for open market operations, alongside a new framework for foreign-exchange operations.

The reforms are intended to strengthen the link between MPC decisions and market conditions, including interest rates, liquidity, exchange-rate movements and the cost of finance available to companies and individuals.

Monetary policy affects the wider economy through money-market rates, bank lending decisions and the allocation of liquidity. Those changes can then influence working-capital finance, business expansion and investment.

Where transmission is slow or weak, a change in the central bank’s policy position may take longer to affect economic activity.

“For me, that is what monetary policy modernization is fundamentally about,” Dr Asiama said.

“It is not only about better models or more instruments to enhance efficiency and ensure effective policymaking. It is about reducing the distance between the policy we intend, the policy the market understands, and the policy the economy ultimately experiences.”

The 14-day BoG bill will provide a tool for managing liquidity at the short end of the financial market. Conditions in that part of the market can influence short-term interest rates before affecting other areas of the financial system.

“We have reintroduced the 14-day bill as our main instrument for conducting OMOs, returning to operations at the very short end of the market where central banks are supposed to operate,” Dr Asiama said.

“This shift aims to improve market functioning and enhance the transmission of policy signals.”

The effectiveness of the policy stance will depend not only on the level of the policy rate, but also on how banks and other financial institutions respond. Lending rates, deposit rates, credit decisions, liquidity allocation and investment behaviour will all determine how far the MPC’s decisions influence the economy.

New foreign-exchange framework

BoG is also changing its approach to the foreign-exchange market, which is another important route through which monetary conditions affect businesses and consumers.

The new Foreign Exchange Operations Framework introduces a rules-based system for the central bank’s interventions in the FX market.

“The framework clarifies the objectives of our interventions, supports reserve accumulation, and helps reduce excessive volatility while maintaining a flexible, market-determined exchange rate,” Dr Asiama said.

Movements in the exchange rate can quickly change the cost of imported raw materials, machinery, fuel and other production inputs. Those changes can in turn affect prices, profit margins and investment plans.

The framework is intended to give market participants a clearer understanding of BoG’s actions while allowing the central bank to build reserves without committing to defend a specific exchange rate.

Together, the 14-day BoG bill and the foreign-exchange framework address two areas with a direct bearing on economic activity: the domestic cost of money and conditions in the FX market.

BoG is also making greater use of high-frequency data to identify inflationary pressures at an earlier stage. Dr Asiama said the central bank now uses an electronic inflation measure calculated almost in real time to support its assessment of price developments.

“Our e-inflation measure is computed almost in real time, providing valuable insights into current price developments and strengthening our now-casting and near-term inflation forecasts,” he said.

“These tools allow us to identify emerging trends more quickly and assess the underlying risks to the inflation outlook.”

The Bank has also upgraded its Quarterly Projection Model to include sector-specific developments. The model is designed to improve the construction of economic baselines, the testing of alternative scenarios and the assessment of risks.

Dr Asiama said monetary policy was necessarily forward-looking, even though much of the economic information available to policymakers described activity that had already taken place.

“The task is therefore to identify emerging pressures early enough and form a good view of where inflation and activity are heading,” he said.

The reforms follow a sharp decline in inflation, which Dr Asiama said had fallen sufficiently to overshoot the central bank’s medium-term target.