ACCRA (Reuters) - Ghana's central bank reduced its main policy rate by 50 basis points on Monday to 25.5 percent, which Governor Abdul-Nashiru Issahaku said reflected a better outlook for inflation and the need to boost growth.

It is also a sign that the government's plan to restore fiscal stability under a $918 million aid programme with the International Monetary Fund is reaping dividends.

"The outlook for inflation is broadly positive as reflected in the continued decline in underlying inflation (and) stability in the forex market .... Growth conditions remain weak and below trends," Issahaku told a news conference.

"With these considerations ... the committee concluded that the downside risks to growth outweigh the risk to inflation."

The modest cut could prompt commercial banks to follow suit, helping to ease business leaders' longstanding concern that the cost of borrowing is too high and stifles expansion and growth.

For years Ghana's economy grew at 8 percent annually on the back of its gold, oil and cocoa exports. But it has slowed sharply since 2013, in part because of lower global commodities prices and the government foresees 2016 growth of 4.1 percent.

Razia Khan, head of Africa research at Standard Chartered bank said the rate cut was smaller than she had expected and could reflect concerns at the central bank that inflation has not fallen as rapidly as it had hoped.

Inflation is set to fall much faster early next year because of a base effect under which last year's cuts to fuel and utility subsidies, which raised prices, will have fed through the system, according to economists.

"The imminent improvement in year-on-year inflation may provide the Bank with stronger justification to ease more aggressively next year," Khan said in an email.

Monday's rate decision is the last major economic announcement before a Dec. 7 election in which President John Mahama is vying for a second and final term and faces a tight race against opposition leader Nana Akufo-Addo.

The government's economic record is a crucial issue for voters, with the opposition arguing economic mismanagement has reduced living standards. The government will almost certainly cite the rate cut as evidence that the economy is improving.

(Reporting by Kwasi Kpodo; Writing by Matthew Mpoke Bigg; Editing by Nellie Peyton and Catherine Evans)