The latest Bank of Ghana bill auctions held on July 27 and July 29 at which it issued a cumulative total of GH¢28.21 billion in 14 day bills, reflect the central bank’s efforts to prevent renewed inflationary pressures from emerging without choking off the recovery in private sector credit. The strategy involves the increasingly active use of BoG bills to sterilize excess liquidity while allowing commercial banks sufficient balance-sheet capacity to continue expanding loans to businesses and households.
Through regular liquidity absorption operations, the central bank has continued to mop up surplus funds from the banking system while supporting its broader inflation-targeting framework. The 14-day BoG bill remains restricted exclusively to banks, making it a pure monetary policy instrument rather than a government financing vehicle.
The need for such sterilization has become more apparent as monetary aggregates have begun to accelerate again after a prolonged period of restraint. During much of 2025 and the first quarter of 2026, reserve money growth slowed sharply as the BoG intensified liquidity management.
According to the BoG, reserve money expanded by only 12.5 percent year-on-year in December 2025, compared with 47.8 percent a year earlier, largely reflecting intensive sterilization operations. Broad money (M2+) growth also moderated substantially to 16.5 percent from 31.9 percent over the same period. By February 2026, reserve money had actually contracted by 0.5 percent year-on-year, while broad money growth had eased further to 16.0 percent.
That period of monetary tightening, however, has gradually given way to stronger liquidity expansion in recent months. The monetary picture began changing during the second quarter of 2026.
Although liquidity growth initially remained subdued, successive BoG monetary policy reports showed that the contraction in reserve money was ending while broad money growth was strengthening.
Two months on from February 2026, reserve money had rebounded into positive territory, growing 3.6 percent, year-on-year, in April.
Although money supply expansion rates remain far below the extraordinarily rapid monetary expansion experienced during earlier inflationary episodes, they nevertheless represent a significant easing in liquidity conditions.
Broad money growth, in particular, has increased by more than six percentage points since February.
Total liquidity, measured as broad money plus foreign-currency deposits, increased by 28.50 percent year-on-year to GH¢417.60 billion in June. This compared with annual growth of 28.00 percent in May and 22.20 percent in April.
The rise in liquidity is illustrated by several trends. Broad money, excluding foreign-currency deposits, expanded by 27.70 percent year on year, to GH¢338.60 billion by June. Narrow money, comprising currency outside banks and demand deposits, increased by 29.10% to GH¢221.50 billion.
Demand deposits recorded annual growth of 33.80 percent, while currency outside banks increased by 20.00 percent. Savings and time deposits expanded by 25.00 percent to GH¢117.00 billion.
The rise in demand deposits suggests that a larger volume of funds was immediately available for transactions, while the growth in savings and time deposits strengthened the banking sector’s pool of funds for lending and investment.
Foreign-currency deposits stood at GH¢79.00 billion in June, representing annual growth of 32.20 percent. Although this was below the 41.70 percent growth recorded in May, it indicates that foreign-currency holdings within the banking system remained significantly higher than a year earlier.
Reserve money, which represents the monetary base controlled most directly by the central bank, increased by 31.70 percent year-on-year to GH¢148.50 billion.
The growth was driven largely by an increase in banks’ reserves, which contributed 20.10 percentage points to the expansion in reserve money. Currency outside banks contributed 10.30 percentage points, while non-bank deposits contributed 1.40 percentage points.
The stronger reserve position of banks points to greater liquidity within the financial system, improving their capacity to support lending and settle transactions.
Net foreign assets emerged as a major source of monetary expansion, growing by 63.60 percent year-on-year in June. Net domestic assets increased by 17.80 percent.
The strong growth in net foreign assets reflects the effect of Ghana’s external-sector performance on domestic liquidity. The country recorded substantial export receipts and a large trade surplus during the first half of 2026, increasing the foreign assets held within the monetary system.
However, net foreign assets declined in absolute terms from GH¢139.10 billion in May to GH¢124.00 billion in June. Net domestic assets, meanwhile, rose from GH¢278.20 billion to GH¢293.60 billion.
Several factors explain the renewed increase in commercial bank liquidity.
First, sustained deposit mobilization has continued to strengthen banks’ funding base as macroeconomic stability has improved. Lower inflation and increased confidence in the financial system have encouraged households and businesses to retain larger balances within the banking sector.
Second, the easing cycle initiated by the BoG has reduced funding costs across the financial system. Lower policy rates have filtered through into lower interbank rates and lower average lending rates, increasing the amount of loanable funds available to banks while simultaneously stimulating credit demand.
Third, government domestic borrowing requirements have become increasingly predictable, reducing uncertainty in liquidity planning by banks.
The result has been abundant liquidity within the banking system.
Indeed, the BoG itself acknowledged during its May Monetary Policy Committee meeting that interbank rates had remained close to the lower boundary of the policy corridor—traditionally a sign that excess liquidity exists within the banking system and that additional sterilization may be required to strengthen monetary policy transmission.
Yet the Bank is consciously avoiding excessive liquidity withdrawal.
This reflects an equally important policy objective: encouraging commercial banks to expand lending to the productive sectors of the economy.
Monetary policy statements throughout 2026 have consistently highlighted the improvement in real private sector credit growth. As inflation declined sharply while nominal lending rates eased more gradually, real borrowing costs became considerably more favourable, encouraging stronger loan demand from businesses and households.
Credit to Ghana’s private sector expanded sharply in the first half of 2026 as stronger liquidity within the financial system and declining interest rates encouraged banks to increase lending to businesses and households.
The Bank of Ghana’s July 2026 Summary of Economic and Financial Data showed that nominal private-sector credit grew by 41.20 percent year-on-year in June, accelerating from 40.40 percent in May and 28.70 percent in April.
When adjusted for inflation, real private-sector credit increased by 34.10 percent, compared with growth of 35.40 percent in May and 24.50 percent in April. The expansion indicates that credit growth remained substantial even after accounting for changes in consumer prices.
The nominal value of private-sector credit reached GH¢119.60 billion at the end of June 2026, up from GHc84.80 billion in the corresponding period of 2025.
Real private-sector credit, measured using the Ghana Statistical Service’s consumer price index, increased to GH¢44.20 billion from GH¢32.90 billion a year earlier.
The figures point to a significant recovery in financial intermediation, with banks directing a larger volume of resources towards companies and individuals after a period in which high interest rates, inflation and economic uncertainty constrained lending.
Private-sector credit growth strengthened progressively during the opening months of 2026. Nominal growth increased from 19.50 percent in January to 18.70 percent in February, before accelerating to 23.80 percent in March, 28.70 percent in April, 40.40 percent in May and 41.20 percent in June.
Real credit growth followed a similar pattern, rising from 15.10 percent in January to 19.90 percent in March and 34.10 percent by June.
The expansion occurred alongside a considerable reduction in borrowing costs. Ghana’s average lending rate declined to 15.64 percent in June 2026 from 27.00 percent a year earlier, while the Ghana Reference Rate fell to 10.02 percent from 23.80 percent.
The BoG does not want its efforts at restraining the potentially inflationary effects of sharp monetary expansion from allowing the economy to benefit from the potential for more – and cheaper – credit to the private sector
Commercial banks are simultaneously deploying their expanding liquidity into three principal assets: loans to the private sector, Government of Ghana securities and Bank of Ghana bills.
From the perspective of individual banks, BoG bills remain particularly attractive. They carry no credit risk, provide predictable returns – currently offering interest rates ranging between 10.44 percent and 10.50 percent – satisfy liquidity management requirements and can be readily traded within the interbank market. The July 27 and July 29 auctions therefore provided banks with another opportunity to invest temporary surplus funds without committing themselves to longer-term lending decisions.
For the central bank, however, these investments perform an entirely different macroeconomic function.
Every cedi invested by commercial banks in BoG bills temporarily removes liquidity from circulation, reducing the volume of funds capable of fuelling excessive aggregate demand, foreign exchange speculation or renewed inflationary pressures.
Importantly, the Bank is seeking to sterilize only the excess liquidity rather than the entire increase in banking system funds.
That distinction explains why commercial bank lending has continued expanding even while BoG bill issuance has intensified.
Indeed, BoG Governor Dr. Johnson Pandit Asiama recently identified liquidity conditions and inflation risks as central considerations for monetary policy, while also announcing the termination of the Bank’s pre-financing arrangements for domestic gold purchases from July 1. That decision itself removes one previous source of central bank liquidity injection into the economy, complementing the sterilization achieved through BoG bills.
Looking ahead, the effectiveness of this balancing act will largely determine whether Ghana can sustain its recent macroeconomic gains.
By: Toma Imirhe / businesspostonline
