Real interest rate gap widest among single-digit inflation economies in Africa

By Ebenezer Chike Adjei NJOKU Ghana is carrying one of the widest real interest rate gaps of any single-digit inflation economy in Africa and among the widest of any economy globally not actively managing a high-inflation crisis. This condition, economists say, is throttling private sector credit access even as the Bank of Ghana (BoG) recently held its benchmark rate steady and declared that domestic recovery on track. The 130th Monetary Policy Committee meeting, which concluded on May 20, maintained the policy rate at 14 percent. Headline inflation stood at 3.4 percent in April 2026, the first marginal increase after fifteen consecutive months of decline.

Consequently, the real interest rate stands at approximately 10.6 percentage points; a spread that places Ghana in anomalous company globally and one that sits in stark contrast to BoG’s stated objective of supporting private sector-led growth. Peer comparisons across the continent show that South Africa’s repo rate of 6.75 percent against April inflation of 4 percent, for instance, yields a real rate of 2.75 percentage points. Kenya, after ten consecutive cuts, holds its benchmark at 8.75 percent against inflation of 5.6 percent, producing a real rate of 3.15 percentage points. Tanzania’s policy rate of 5.75 percent against inflation of approximately 4 percent generates a spread of 1.75 percentage points.

Nigeria nominally posts a wider nominal gap, a policy rate of 26.5 percent against April inflation of 15.69 percent – but its 10.81 percentage point spread reflects deliberate crisis-management tightening against stubbornly elevated double-digit prices, a structurally distinct condition. In advanced economies like the United States, the Federal Reserve held its benchmark rate in a range of 3.5 to 3.75 percent at its April 29 meeting against April inflation of 3.8 percent. Similarly, the European Central Bank set a rate of approximately 2 percent against eurozone inflation of 4.2 percent and is effectively neutral. Ghana’s anomaly is not so much the product of aggressive tightening as disinflation that outpaced the cutting cycle.

The BoG delivered five consecutive rate reductions that brought the policy rate from 29 percent to 14 percent. Inflation however fell faster, from a peak of 54 percent in late 2022 to 3.4 percent for April 2026. The result is a real rate that has grown more restrictive in effective terms even as the nominal rate declined. “The Bank of Ghana would have cut further but for the vulnerabilities it identified. The external environment – the Middle East conflict, rising import costs, the cedi’s depreciation – has complicated what would otherwise have been a straightforward easing decision.

The pace of disinflation has simply moved faster than the committee felt comfortable following,” Dr. Daniel Osabutey, a Senior Lecturer with the School of Business at Accra Technical University, told B&FT. The MPC’s decision to hold on May 20 was widely anticipated following April’s inflation uptick and the external risk environment created by the Middle East conflict. Governor Dr.

Johnson Pandit Asiama cited the disruption of maritime and air traffic around the Strait of Hormuz, rising global energy and food prices, and the IMF’s downward revision of the 2026 global growth forecast from 3.3 percent to 3.1 percent as factors informing the Committee’s caution. The Composite Index of Economic Activity (CEAI) expanded by 12.6 percent year-on-year in March 2026, pointing to the domestic economy retaining momentum. A fiscal surplus of 0.1 percent of Gross Domestic Product (GDP) was recorded in the first quarter against a target deficit of 1.2 percent.

Yet the strength of those headline figures has not translated into affordable credit for the private sector. Average commercial bank lending rates, while lower than their 2024 peaks, remain well above 20 percent at most institutions; a spread of more than six percentage points over the policy rate that reflects risk pricing, liquidity management costs and the residual effects of balance sheet repair following the Domestic Debt Exchange Programme (DDEP). The credit data offer a partial counterpoint, but one that underscores rather than resolves the underlying tension. Real private sector credit grew 24.5 percent year-on-year in April 2026, reversing a contraction of 7.3 percent as recently as May 2025 as Treasury bill yields compressed from above 15 percent to 4.9 percent, narrowing the opportunity cost of private lending.

Yet banks have simultaneously shifted their investment portfolios sharply toward short-duration instruments, with Treasury bills accounting for 65 percent of holdings against 44.5 percent a year earlier, while net interest margins fell from 14 percent to 9.3 percent; a compression that suggests the sector is passing on lower yields to shareholders before passing them on to borrowers. Governor Asiama himself, at the opening of the 130th MPC meeting, questioned whether current conditions are “sufficiently effective in influencing lending conditions going forward”. “If the policy rate is 14 percent and banks are lending above 20 percent, that spread is difficult to justify. A rate of 17 or 18 percent would be defensible given operating costs and risk margins, but beyond that the Bank of Ghana needs to be firm. The transmission mechanism is not working as it should,” Dr.

Osabutey added. The MPC statement acknowledged this disconnect, noting that the Committee had examined why lending rates remain elevated despite previous policy cuts. No specific corrective measure was announced beyond the Cash Reserve Ratio amendment, which is directed primarily at reserve management rather than credit pricing. For businesses, particularly small and medium enterprises that lack access to development finance alternatives, the prevailing rate environment remains prohibitive.

A working capital loan priced at 24 percent in an economy where inflation is 3.4 percent represents a real borrowing cost of approximately 20 percent – a level consistent with distress financing rather than ordinary commercial credit. Gross international reserves rose to US$14.4billion as of May 18, equivalent to 5.7 months of import cover, providing the central bank with considerable external buffers. The cedi’s 8.4 percent depreciation since the start of May, attributed primarily to energy sector demand and corporate dividend payments, has introduced a new variable into the inflation outlook and given the MPC additional grounds for holding. The next MPC meeting is scheduled for July 22.

With the IMF’s sixth and final programme review concluded in Accra this week amid what observers described as signs of progress alongside lingering concerns, the central bank’s room to cut further will depend partly on whether the post-programme fiscal anchor is credible enough to absorb additional monetary easing without triggering exchange rate or inflation spillovers. “The July meeting is the one that matters. If the May inflation reading, due in the coming weeks, shows the April uptick was transient rather than directional, the case for a further cut becomes difficult to resist,” the senior lecturer noted. He added that a 100 to 200 basis points increase is a possiblity if external pressures persist. “I would not rule out an increase to 15 or even 16 percent if the external vulnerabilities persist. The cedi has started depreciating and if that feeds back into inflation, the committee’s options narrow.

Based on current fundamentals, the worst-case scenario is inflation returning to around 6 percent,” he further stated. Post Views: 7