The Institute of Economic Affairs (IEA) is urging the Monetary Policy Committee (MPC) of the Bank of Ghana to increase the Policy Rate by a further 100-150 basis points, taking the rate to 20% or 20.5%.
This adjustment, it believes, will narrow the inflation-Policy Rate (PR) gap, although the real Policy Rate will still remain negative.
Presently, inflation (June 2022) stands at 29.8%.
But in a statement signed by its Director of Research, Dr. John Kwakye, the IEA said the adjustment will signal the MPC’s unwavering commitment to fighting inflation and bringing it under control.
“The adjustment will also send the right signal to, and help calm the markets”, it pointed out.
Furthermore, it said “the next meeting of the MPC in September, when the Committee would have had the benefit of two more inflation readings in July and August [2022], would give it a clearer sense of the trend for it to reposition the PR accordingly.”
Continuing, the IEA said, “to deal effectively with the current inflation—and to limit the harm that exclusive use of the PR could cause—we have called for the Bank of Ghana and government to work together to target directly the key inflation drivers, viz. food, fuel, transport and the exchange rate”.
“We have provided detailed suggestions to address these factors in a July 12 [2022] Roundtable paper titled: Rethinking Inflation Management in the Wake of Covi-19 and Russia-Ukraine War”, it stressed.
In major countries such as the US and UK, the IEA said governments have made inflation control a top policy priority and are taking measures to complement their central banks’ actions, adding, the same approach is needed in Ghana.
“Even the IMF which is known not to be a fan of subsidies, has called on member governments to provide food subsidies to their citizens to cushion the cost of living crisis. This call should tell us that new interventions are required in dealing with what is clearly an unconventional type of inflation that is currently sweeping the globe.”
BoG increases policy rate to 19% in May 2022
The MPC of the Bank of Ghana for the second consecutive time in May 2022 increased the Policy Rate – the rate at which it lends to commercial banks by 200 basis points to 19%.
The increase in the Central Bank’s monetary policy rate meant cost of borrowing went up at least for the next two and half months.
Prior to the announcement of the Policy Rate, the Central Bank had indicated its intention to tame inflation in order to bring interest rates down and consequently lending rate.
Credit: Business Analyst
