BoG’s Cautious Approach Creating Arbitrage Windfall for Banks – Economist

An Economist and Senior Lecturer at the Ghana Institute of Management and Public Administration (GIMPA), Dr Raziel Obeng-Okon, has described the recent 300 basis point cut in the policy rate by the Bank of Ghana as long overdue but not far-reaching enough to fully align with Ghana’s current macroeconomic trends and support real economic recovery.

Speaking to The High Street Journal, Dr Obeng-Okon noted that while the reduction in the Monetary Policy Rate from 28 to 25 percent reflects easing inflation and relative cedi stability, the central bank had held off too long despite clear signals from the market. He believes a more progressive and earlier easing strategy, perhaps phased over multiple sittings, would have brought stronger relief to businesses and the financial sector.

“The signs were there from day one that inflation was trending downward, largely because exchange rate pressures were easing. But the Bank of Ghana delayed action, choosing to hold the rate for several policy sittings when market conditions clearly justified a cut,” he stated.

He warned that the lag in policy action has created distortionary effects in the market, particularly in the way commercial banks profit from Bank of Ghana bills (BOG bills) instead of supporting productive lending to the private sector. Dr Obeng-Okon explained that when monetary policy rates are high, BOG bill rates tend to mirror them, creating what he called free money for banks.

“Banks have had little incentive to lend to real businesses when they can earn double-digit returns, sometimes over 20 percent, by simply buying BOG bills. That is arbitrage, not real banking,” he said. He emphasized the need for closer alignment between the policy rate, BOG bill yields, and market realities to prevent inefficiencies in monetary transmission.

According to him, the volatility in BOG bill rates, ranging between 8 to 25 percent in a matter of weeks, reflects the lack of clarity and consistency in monetary signaling. “We cannot have such wide swings. It undermines confidence and makes it difficult for businesses and investors to plan,” he cautioned.

He further urged the Bank of Ghana to provide clearer guidance on its rate trajectory, arguing that consistent, gradual reductions would have been more effective. “A phased cut of 100 or 200 basis points per sitting, in line with inflation trends, would have been better than holding out for too long and then suddenly dropping by 300 points.”

While acknowledging the positive direction of the recent cut, Dr Obeng-Okon stressed that further reductions are necessary to bring borrowing costs closer to inflation-adjusted levels and stimulate credit to the private sector. He also noted that government’s fiscal tightening and lower Treasury bill acceptance rates should have given the central bank more room to act earlier.

“For a recovering economy, the policy rate must carry a reasonable premium over inflation, not the excessive spread we have seen. Businesses need affordable credit to grow, not policy inertia,” he concluded.

The Bank of Ghana’s decision to cut rates comes at a time of improving macroeconomic indicators, including slowing inflation and rising gross reserves. However, economists like Dr Obeng-Okon argue that for the real sector to benefit, the central bank must go beyond symbolic adjustments and ensure alignment across its monetary tools, especially in ways that close loopholes and incentivize banks to support productive sectors.

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