BoG amends dynamic cash reserve ratio, maintains policy rate at 28%

The Bank of Ghana (BoG) announced a significant policy change. Starting June 5, 2025, commercial banks must hold reserves in the same currency as their deposits. This means foreign currency deposits need foreign currency reserves, while cedi deposits require cedi reserves.

The BoG introduced a dynamic cash reserve ratio (CRR) framework. This framework varies based on banks’ loan-to-deposit ratios. The CRRs are set at 25% for LDRs below 40%, 20% for LDRs between 40% and 55%, and 15% for LDRs above 55%. This move aims to discourage overinvestment in government securities and promote private sector lending.

This policy has increased reserves at the central bank and absorbed excess liquidity. Governor Dr. Johnson Pandit Asiama explained that this change tightens the liquidity framework and enhances monetary transmission.

Economic indicators are improving. The updated composite index of economic activity rose by 2.3% year-on-year in March 2025, more than double last year's growth rate. Consumer and business confidence is at its highest in seven years due to declining inflation and a stable exchange rate.

Headline inflation fell to 21.2% in April, down by 2.6 percentage points since January. This decline affects both food and non-food components, thanks to tighter monetary policy, exchange rate stability, and lower petroleum prices.

Dr. Asiama noted that core inflation shows sustained easing as well. The Monetary Policy Committee (MPC) expects faster convergence toward the medium-term inflation target by Q1 of 2026 if no major shocks occur. The end-year inflation target is now set at 12%.

Ghana's fiscal position is also improving despite revenue shortfalls in Q1 of 2025. Expenditure cuts helped maintain the primary balance in check. Public debt was GH¢769.4 billion at the end of March, or 55% of GDP—down from 61.8% in December.

On the external front, Ghana recorded a current account surplus of US$2.1 billion in Q1 of 2025 due to higher export earnings from gold and cocoa along with strong remittance inflows. This resulted in an overall balance of payments surplus of US$1.1 billion.

Gross international reserves increased to US$10.7 billion, covering about 4.7 months of imports. The cedi appreciated significantly against major currencies as well: up by 24.1% against the U.S dollar, by 16.2% against the British pound, and by 14.1% against the euro as of May 21, 2025.

Analysts attribute this rally to fiscal consolidation efforts and strict foreign exchange rules enforced by the central bank’s hawkish stance on monetary policy.

Despite these gains, inflation remains high compared to medium-term goals according to MPC members like Dr Asiama who emphasized maintaining a tight monetary policy stance is crucial for disinflation efforts.

The unchanged policy rate reflects cautious optimism from the bank while recognizing ongoing vulnerabilities within the economy due to global headwinds like rising trade tariffs and uncertainty among advanced economies affecting investor sentiment towards emerging markets like Ghana.

Monetary authorities acknowledged differing paths taken by central banks worldwide regarding their policies; some remain tight while others ease due to falling inflation rates globally impacting decisions made domestically focused on restoring price stability effectively moving forward into future meetings scheduled for July of this year.