Tiered CRR review: Banking and economic implications

The Cash Reserve Ratio (CRR) has long served as a vital monetary policy instrument for the Bank of Ghana (BoG), playing a central role in liquidity management, money supply and the stabilization of the financial sector and general price level. Over time, the CRR has been modified in response to shifting economic landscape and emerging challenges. In more recent years, the CRR has been adjusted to tackle inflation and liquidity challenges. In September 2022, the BoG announced a phased increase from 12% to 15%, executed in three stages: 13% in September, 14% in October, and 15% in November. However, in December 2022, the CRR was reduced to 12% as part of measures to cushion banks during the domestic debt exchange program. By April 2023, the BoG reset the CRR to 14% to manage excess liquidity while supporting economic recovery. The key objective for the increase in the CRR was to mop-up excess liquidity within the banking system by deploying it as an inflation targeting tool. Over the period of its implementation, inflationary pressures have persisted, and the targeted inflation rate was missed by a wide margin. The policy does not do much to mop up liquidity in the informal sector, hence the failure to significantly impact inflation. (...)