Impact of Treasury Bill Rates on Bank of Ghana’s Monetary Policy: Inflation, Liquidity, and Economic Growth

The Bank of Ghana (BoG), established under the Bank of Ghana Act 2002 (Act 612), holds operational independence and is tasked with managing the country’s monetary policy through a framework that targets inflation control. This framework uses inflation forecasts that incorporate various macroeconomic variables, not just the money supply. Central to this framework is the Monetary Policy Rate (MPR), which is adjusted bi-monthly by the BoG's Monetary Policy Committee (MPC) to align with inflation targets set in collaboration with the Ministry of Finance.

As part of its monetary policy, the BoG sets a medium-term inflation target of 8% (±2%) for the period 2023-2025, with a year-end inflation target for 2025 at 11.9% (±2%). When inflation deviates from this target, the MPC assesses key economic indicators and adjusts the MPR accordingly. The BoG implements policy changes through open market operations (OMO), issuing and redeeming securities, and intervening in the foreign exchange market.

The Role of the Bank of Ghana

The BoG is pivotal in managing liquidity in the money market and ensuring overall financial stability. By adjusting the MPR, the BoG directly impacts liquidity conditions, lending rates, and broader economic activity. For example, a decline in Treasury bill (T-bill) rates may prompt the BoG to reduce its policy rate to maintain a stable interest rate environment.

Treasury Bills and Their Impact on the Money Market

T-bills are short-term debt securities issued by the government to fund its operations, and their yields serve as key benchmarks for interest rates in the broader economy. When T-bill rates decline, it can signal a loosening of monetary policy. This reduction in rates lowers the government’s borrowing costs, thereby improving fiscal space and potentially encouraging private-sector investments.

Consequences of Falling T-bill Rates

A decrease in T-bill rates generally reflects an easing of monetary policy and can have several economic consequences:

• Increased Liquidity: Lower rates tend to encourage more lending by banks, promoting credit expansion.
• Reduced Borrowing Costs: Cheaper loans make it easier for businesses and households to access credit, which stimulates both investment and consumption.
• Potential Inflationary Pressures: If liquidity and demand increase without proper management, inflation may rise.

Macroeconomic and Fiscal Effects

Lower interest rates can spur economic growth by incentivizing investment and consumption. However, maintaining fiscal discipline is essential to ensuring that the reduction in borrowing costs translates into sustainable economic expansion rather than excessive government spending. Ghana’s focus should be on fiscal consolidation, using savings from lower interest rates to reduce debt instead of financing additional expenditures.

Foreign Exchange Stability

Foreign exchange stability is critical when evaluating the long-term effects of lower domestic interest rates. While sharp drops in interest rates can lead to capital flight and currency depreciation, Ghana’s foreign exchange market has remained relatively stable. The cedi has depreciated modestly (approximately 5.3%) since the start of the year, suggesting some resilience in the currency.

Crowding-In Effect and Private Sector Growth

A lower interest rate environment can lead to a "crowding-in" effect, where reduced government borrowing costs enable private sector businesses to access more affordable credit. This, in turn, can stimulate investment in new projects and businesses, ultimately driving economic growth. For the private sector to fully benefit from this environment, strengthening the financial sector and enhancing credit access for businesses will be critical.

Conclusion

Considering the current inflation outlook and potential currency pressures, the BoG may choose to keep the policy rate at 27%. External factors, such as MTN’s GHC3.8 billion (US$250 million) dividend payment and significant profit declarations from 14 foreign banks, may influence this decision. Additionally, the Ghana Cocoa Board’s potential need to transfer nearly US$2 billion for debt obligations could place pressure on the cedi. To mitigate inflationary risks, the BoG might either hold the policy rate at 27% or reduce it slightly to 26.5%.

If macroeconomic conditions improve—marked by falling inflation, strong real growth, and fiscal stability—the BoG could eventually ease its monetary policy, lowering lending rates and fostering economic expansion. However, persistent inflationary pressures driven by rising food and fuel prices may require tightening measures to stabilize the economy.

Ultimately, the BoG’s policy decisions must strike a balance between controlling inflation, managing liquidity, and supporting economic growth to ensure long-term financial stability.

Source; theghanareport