Central Bank Policy Transmission

How Rate Decisions Reach the Real Economy Across Four African Markets

Published: May 2026 | Kanari Intelligence

---

Executive Summary

When a central bank raises or lowers its policy rate, the decision is supposed to ripple outward through the financial system: banks adjust lending rates, businesses recalibrate investment plans, consumers modify spending, and inflation responds. This is the monetary policy transmission mechanism, and it works reasonably well in advanced economies with deep financial markets and credible institutions.

In Ghana, Nigeria, Kenya, and South Africa, the story is different. This report examines 25 years of data across these four economies to assess how effectively central bank rate decisions transmit to the real economy. The findings reveal a stark divergence: South Africa operates a near-textbook inflation targeting regime, while Ghana and Nigeria face severe transmission breakdowns driven by fiscal dominance, currency instability, and shallow financial markets.

Key findings:

• Inflation divergence is extreme. Ghana's CPI (2010=100) reached 749 by 2024 -- prices 7.5x their 2010 level. Nigeria hit 699 (7x). Kenya reached 257 (2.6x). South Africa stood at 203 (2x) [1]. The gap between the best and worst performers widened from near-parity in 2010 to a 3.7x differential by 2024.
• Real interest rates tell a credibility story. South Africa has maintained consistently positive real rates (averaging 4.3% over 25 years), reflecting SARB's institutional credibility [2]. Nigeria's real rate collapsed to -25.8% in 2019, reflecting a period where the CBN held nominal rates artificially low while inflation surged [3].
• Nigeria's naira float destroyed USD-denominated GDP. The naira moved from ~305/USD in 2020 (the official rate) to 800/USD in 2024 [4], causing Nigeria's nominal GDP in dollar terms to fall 61% from $647B (2022) to $252B (2024), even as real GDP growth continued at 3-4%.
• Ghana's 2022-2025 crisis and recovery demonstrates the limits and potential of monetary policy. Inflation peaked at 54.6% in December 2022, then collapsed to 6.3% by November 2025 following aggressive fiscal consolidation, IMF support, and tight monetary policy [5].

---

1. The Four Central Banks

Four central banks, four mandates, four levels of institutional credibility. Understanding the transmission problem starts with understanding the institutions.

Bank of Ghana (BoG)

Mandate: Price stability, with a medium-term inflation target of 8 +/- 2 percent [6].

Primary tool: The Monetary Policy Rate (MPR), set by the Monetary Policy Committee.

Credibility challenge: The BoG's credibility suffered severely during the 2022-2023 crisis. Inflation peaked at 54.6% in December 2022, far exceeding the target band [7]. The Cedi depreciated 27.8% against the USD in 2023 alone [8]. A key vulnerability was monetary financing of the budget -- a structural weakness that let fiscal pressures override monetary policy; ending that practice became a core structural benchmark under the 2023 IMF programme [1].

Transmission assessment: Weak to moderate. The BoG's rate decisions transmit slowly to lending rates due to high banking sector concentration, wide interest rate spreads, and the dominance of government securities in bank portfolios. Research from the Ghana Association of Banks found that interest rate movements exert statistically significant but lagged effects on credit quality, with aggressive tightening actually increasing non-performing loans as debt-servicing pressures materialise [9].

Central Bank of Nigeria (CBN)

Mandate: Price stability and exchange rate stability -- a dual mandate that often creates internal contradictions.

Primary tool: The Monetary Policy Rate (MPR). The CBN also deploys the Cash Reserve Ratio (CRR), which has been used aggressively as a sterilisation tool [10].

Credibility challenge: The CBN's credibility was severely damaged during the 2015-2023 period of multiple exchange rate windows and administrative controls. The MPR was raised from 12% (2013) to 13% (2014) [10], then to 16.5% (November 2022) [11], and through a series of 2023 hikes to 18.75% by mid-2023 [3] as inflation accelerated to 26.72%. The combination of high MPR, multiple exchange rate regimes, and capital controls created a system where the policy rate was disconnected from actual market conditions.

Transmission assessment: Weak. The multiple exchange rate regime (which persisted until the June 2023 naira float) meant that the CBN's rate decisions operated in a distorted environment. The spread between the official and parallel market rates at times exceeded 100%, meaning that monetary policy operated on a fictitious price signal [12]. The NDIC has documented the challenges of monetary policy transmission in the context of Nigeria's financial openness [13].

Central Bank of Kenya (CBK)

Mandate: Price stability, formulating and implementing monetary policy to achieve low and stable inflation [14].

Primary tool: The Central Bank Rate (CBR), which forms the base for all monetary policy operations. The CBK also operates an interest rate corridor with a standing lending facility and deposit facility [15].

Credibility track record: The CBK has maintained relatively strong credibility. It raised the CBR from 8.5% (mid-2014) [16] to 10% (June 2015) [17] and then to 11.5% [18] to anchor inflation expectations. More recently, it raised the CBR from 10.5% (July 2023) to 13.0% (February 2024) to address exchange rate pressures [19]. Kenya's CPI trajectory (2.6x since 2010) reflects this relative discipline.

Transmission assessment: Moderate. The CBK's transmission mechanism works through interest rate, credit, exchange rate, and asset price channels [14]. However, effectiveness depends on the stability of the money demand function, and Kenya's expanding financial sector -- including mobile money -- has complicated transmission. Research from the Kenya Bankers Association has examined the risk-taking transmission channel, finding that monetary policy affects bank lending behaviour through risk appetite as well as through the traditional interest rate channel [20].

South African Reserve Bank (SARB)

Mandate: Protect the value of the currency in the interest of balanced and sustainable economic growth. SARB operates a formal inflation targeting framework with a 3-6% target band.

Primary tool: The repo rate. The Monetary Policy Committee maintained the repo rate at 8.25% and the prime rate at 11.75% in March 2024, with annual consumer price inflation at 5.3% [2].

Credibility track record: SARB is widely regarded as the most credible central bank among the four. Its inflation targeting framework, implemented in 2000, has kept inflation within the 3-6% band for most of the past two decades. The Monetary Policy Implementation Framework (MPIF), implemented in 2022, has helped SARB better manage growing structural liquidity while improving policy transmission [21]. The IMF has noted that SARB's transparent practices reinforce the effectiveness of monetary policy.

Transmission assessment: Strong. South Africa has the deepest financial markets, the most developed banking sector, and the most transparent monetary policy framework among the four countries. The government bond yield curve decreased by 40-140 basis points in the period under review, reflecting improved investor confidence [22]. PwC analysis shows the major banks' combined headline earnings reached a record R113.2 billion, underpinned by strong operating franchises [23]. The Banking Association South Africa notes that banks offer each customer an interest rate quoted using prime as a reference rate, directly linked to SARB's repo rate decisions [24].

---