BoG’s 22% Policy Rate apt; it’ll fight inflation – US-based Economist

Dr. Ernest Addison is the Governor of the Bank of Ghana

A United States-based Assistant Professor of Economics at Niagara University, Dr. Dennis Nsafoah has welcomed the decision by the Monetary Policy Committee (MPC) of the Bank of Ghana (BoG) to increase the Policy Rate from 19 per cent to 22 per cent.

He explained that the new rate seeks to fight high inflation rate on two fronts.

First, he said, it will slow down demand to give supply time to catch up in dealing with the excess demand in the economy.

“We think the decision to increase the policy rate is a step in the right direction, even though it could have been done a month earlier. The increase in the policy rate serves two main purposes in the fight against inflation. First, it will slow down demand to give supply time to catch up in dealing with the excess demand in the economy” he told journalist on Friday August 19.

“In as much as some of the factors driving inflation are supply shocks, the Central Bank does not have the tools to deal with supply shocks. Neither should the Central Bank sit on the sidelines when inflationary pressures have spread across all sectors of the economy. The best response of an inflation targeting Central Bank in this case is to raise the policy rate.

“The second purpose of the decision, which we consider even more important, is that an increase in the policy rate will help anchor inflation expectations around the target. The tendency for inflation to persist occurs mainly because of inflation expectations. Inflation is a self-fulfilling prophesy. If markets expect inflation to be higher than target in future, inflation will be higher than target today.” he added.

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Speaking at the MPC’s emergency meeting in Accra on Wednesday, August 17, the Governor of the BoG Dr Ernest Addison said recent developments in the foreign exchange market showed elevated demand pressures, reflecting among others, continued heightening of uncertainties in the global economy, rising inflation in many advanced economies and the resultant coordinated tightening of monetary policy stance by major central banks.

This, he added, has further tightened global financing conditions with significant implications for Emerging Markets and Developing Economies (EMDEs), especially for those with weak fundamentals.

The US Dollar has strengthened against all major currencies. From the beginning of the year to date, the pound sterling has weakened against the US dollar by 12.4 percent while the Euro has also weakened by 11.8 percent. Countries similar to Ghana (Ghana’s peers) are all experiencing sharp depreciation to date.

The Ghana Cedi, he noted, has depreciated by 25.5 percent year-to-date, reflecting the Ghanaspecific situation, including the challenging financing of the budget from both domestic and external sources, downgrading of sovereign credit rating, nonresidents disinvestment in local currency bonds, and loss of reserve buffers.

“The execution of the budget for the year has remained challenging. Revenue has not kept pace with projections and created financing challenges. In the absence of access to the international capital market and given the constrained domestic financing, central bank overdraft has helped to close the financing gap as reflected in the mid-year budget review. The Bank of Ghana is working with the Ministry of Finance to agree on a cap on the overdraft.

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“Whilst addressing the immediate financing problems, the ongoing policy discussions with the IMF are expected to address the underlying
macroeconomic challenges, restore fiscal and debt sustainability and provide a sustainable balance of payments cushion.

“Under the circumstances, and considering the risks to the inflation outlook, the Committee decided on a 300 basis points increase in the Monetary Policy Rate to 22 percent.”

By Laud Nartey||Ghana