Monetary policy rate adjustment and commercial bank lending rates time-frequency co-movement in Ghana: Evidence from a wavelet-based approach

This paper examines the time-frequency dynamics of the monetary policy rate change (MPR) and commercial bank lending rate change (CBLR) in Ghana between 2006 and 2022. Based on monthly data, the paper employs a wavelet coherence approach coupled with nonlinear Diks and Panchenko causality tests to explore the co-movement and causality between MPRA and CBLR and the degree to which the key macroeconomic and banking sector determinants of inflation, exchange rate, deposit interest rate, money supply (M2), and non-performing loans (NPL) affect them. The findings uncover a strong short-run positive co-movement between MPRA and CBLR, whereas medium- and long-run interactions are negative or mixed, which indicates structural inefficiencies in policy transmission. Exchange rate and inflation are found to significantly and persistently impact lending rates across all frequencies. Gradual movements in the policy rate and enhanced exchange rate stability are suggested by the authors for monetary policy effectiveness. These results have important policy implications for banks and the Bank of Ghana in pricing credit in relation to macroeconomic determinants to achieve economic growth and financial stability.