EXPLAINER: How the Bank of Ghana keeps the economy stable

When inflation rises, the cedi comes under pressure, or borrowing becomes too expensive, the Bank of Ghana has tools it can use to influence what happens next.

These tools form part of the central bank’s monetary policy framework and help it respond to changing economic conditions.

But how exactly does the central bank manage the economy?

GhanaWeb Business looks at three key areas through which the central bank carries out this role.

Policy rate

One of the main tools is the policy rate.

This is the interest rate used by the central bank to signal the direction of borrowing costs in the economy. It influences the rates commercial banks charge their customers.

When the policy rate is increased, borrowing generally becomes more expensive. Businesses and households may then reduce borrowing and spending, which can help ease pressure on prices.

When the policy rate is lowered, borrowing can become cheaper. This can encourage businesses to invest and households to spend, supporting economic activity.

The central bank considers several factors when deciding where to set the policy rate.

These include inflation trends, movements in the exchange rate, global commodity prices, credit conditions and developments in the global economy.

Managing liquidity

Another important function is liquidity management.

Liquidity refers to the amount of money available within the banking system.

If there is too much money circulating in the economy relative to the goods and services available, it can increase demand and put upward pressure on prices.

The central bank can therefore use open market operations (OMO) to manage the amount of money in the banking system.

Through these operations, the central bank can absorb excess liquidity when necessary. This reduces the amount of money available for circulation and can help ease inflationary pressures.

Building and managing foreign reserves

The central bank also manages Ghana’s foreign exchange reserves.

These reserves are assets held in foreign currencies and other internationally accepted forms. They provide a buffer for the country during periods of economic or financial pressure.

For example, reserves can help Ghana meet external payment needs, support confidence in the economy, and provide room to respond when the cedi comes under pressure or import costs rise.

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The management of these reserves is guided by three key principles: safety, liquidity and return.

Safety means keeping Ghana’s reserves in secure and reliable investments to protect the funds.

Liquidity means ensuring the money can be accessed quickly when Ghana needs it.

Return means earning some income from the reserves while ensuring that safety and quick access remain the priorities.

Together, these functions help the Bank of Ghana manage money in the financial system, respond to economic challenges and protect the country’s financial stability.

The central bank therefore does more than monitor the economy. It uses various monetary policy tools to help control inflation, maintain financial stability and support sustainable economic growth.

DR/MA

Central Banking 101: How Bank of Ghana’s Monetary Policy works