BoG’s response to inflation crisis largely in sync with expectations – IEA

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The Institute of Economic Affairs (IEA) has welcomed the decision by the Monetary Policy Committee (MPC) to increase the policy rate.

This decision, according to the IEA, met their expectations after they called on the central bank to up the rate.

The BoG increased policy rate by 200 basis points to 19 percent at the MPC meeting on Monday May 23.

The MPC attributed the decision to up the policy to increasing inflation rate.

Addressing a press conference in Accra on Monday May 23, Governor of the Bank of Ghana Dr Ernest Addison said “Despite the improvement in the trade balance due to favourable commodity prices, the external sector has weakened somewhat due to developments in the capital and financial account. The domestic economy does not fully benefit from higher oil and gold prices due to retention agreements in these sectors.

“The increased repatriation from dividend payments and profits, as well as the net portfolio reversals, have resulted in a widened balance of payments outturn and loss of reserves. The prevailing tight global financing conditions, and further
policy rate hikes in Advanced Economies continue to pose risks to the external outlook.

“Headline inflation surged in April 2022. And, both headline and core inflation have stretched further above the upper limit of medium-term target band. The heightened uncertainty surrounding the inflation dynamics has weighed heavily on the domestic environment and significantly depressed business and consumer sentiments.

“The inflation numbers show that while food inflation has accounted for the increases in inflation over the past year, the recent jump in April shows that relative price increases in the non-food sector is accelerating at a fast pace, which provides information on the extent to which prices are becoming embedded. The Bank’s latest forecast shows a continued elevated inflation profile in the near term, with a prolonged horizon for inflation to return to the target band.

“Inflation expectations by consumers, businesses and the banking sector have also heightened. The risks to the inflation outlook are on the upside, and emanate from availability of inputs for food production, imported inflation, continued upward adjustments in ex-pump petroleum prices and transportation costs, possible increases in utility tariffs, and potential wage pressures. The second-round effects of these administered price adjustments would further amplify inflation pressures in the outlook.

“These considerations show that with the strong rebound in growth and the closing of the negative output gap, the balance of risk is clearly on inflation. The MPC took the view that it needed to decisively address the current inflationary pressures to re-anchor expectations and help foster macroeconomic stability. On the basis of the above assessment, the Committee decided to raise the policy
rate by 200 basis points to 19 percent.”

Director of Research at the Institute of Economic Affairs (IEA) Dr John Kwakye who earlier said the MPC faced a difficult decision at its meeting in the face of the rising inflation, said ” The IEA takes comfort in the fact that the MPC agreed with with it on the quantum on the increase and raised the Policy Rate by 200 basis points.”

By Laud Nartey||Ghana

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