Answer to Question #105429 in Macroeconomics for Nana kwaku Asante

Question

The Bank of Ghana (BoG) has kept the monetary policy rate at 16 percent. The policy rate is the rate at which the Central Bank lends money to the commercial banks. Governor of the Bank of Ghana (BoG), Dr. Ernest Addison, told journalists at a press conference in January 31st, 2020 that the Bank took the decision to maintain the rate which was the 6th consecutive hold.
In an essay form, explain how the central Banks policy rate affects inflation in Ghana and its subsequent impact on Ghanaian businesses.

Answer 1

When interest rates rise, savers can earn more on their demand deposit accounts and are more likely to delay present consumption for future consumption. Conversely, it is more expensive to borrow money, which discourages lending. Since lending in a modern fractional reserve banking system actually creates "new" money, discouraging lending slows the rate of monetary growth and inflation and also business activities. The opposite is true if interest rates are lowered; saving is less attractive, borrowing is cheaper, and spending, inflation and also business activities is likely to increase.