Time to reform the Ghana Reference Rate: From Treasury Bill Yields to Banks’ Deposit Costs

The Ghana Reference Rate (GRR) is the benchmark interest rate that influences businesses making decisions about borrowing for equipment, restocking, or payroll. Its usefulness hinges on whether it accurately reflects financing conditions and if borrowers can comprehend its conversion into the interest rates they pay. The primary issue lies in the GRR's current formula, which combines policy signals, interbank borrowing, and government investment returns without directly measuring banks' deposit costs.

Additionally, the reserve adjustment in the GRR formula amplifies the impact of Treasury bill movements beyond the initial 40% weight it was meant to have.

Evidence suggests that a review of the benchmark's weights and a test of a straightforward formula incorporating banks' deposit interest costs would be beneficial. The key questions addressed in this article are: Who does the GRR measure—the cost of debt or government borrowing? Why should bank deposit costs supplant government borrowing rates in the GRR formula?

The GRR is calculated using the annualized 91-day Treasury bill rate (T₉₁), the cash reserve ratio (CRR), and the cash-in-vault ratio (CIV). These variables are weighted at 40% each, summing up to 100%. For instance, with a CRR of 20% and a CIV of 2%, the denominator in the formula is 0.78. Consequently, a 5.38% Treasury bill rate translates into a formula-based GRR of 6.90% before applying the 40% weight.

Notably, a 1 percentage-point increase in the Treasury bill rate results in a 0.513 percentage-point rise in the GRR under the given conditions, compared to a 0.400-point increase from a policy rate rise, and a 0.200-point increase from an interbank rate change. These comparisons assume constant other inputs. The sensitivities were calculated using a 20% CRR, a 2% CIV, and the 40/20/40 formula.