Increasing the policy rate will reduce risk of foreign currency inflows
Increased policy rate will affect cost of living, IEA
The Institute of Economic Affairs (IEA) has stated that the immediate response to the increasing inflation in the country is for the Bank of Ghana to tighten the Monetary Policy Rate
The IEA suggested the policy rate be increased by another 200 basis points to 19.0%.
The IEA noted that even though it will be a difficult decision for the Bank of Ghana, it will help narrow the inflation gap and “also ease to some extent the risk of foreign currency outflows.”
Increasing the policy rate will increase the cost of living and doing business because lending rates will go up further whiles reducing money supply.
The Monetary Planning Committee will be meeting from tomorrow, May 18th, 2022 till Friday, May 20, 2022.
Additionally, the IEA noted that “the adjustment will also provide some assurance to the markets that the BoG is committed to addressing the resurging inflation. Anything less than this may be interpreted as a weak response, which may be concerning to the markets.”
“The BoG must buttress its decision with an effective communication strategy to make its intentions clear so that the Bank can rally the markets behind the decision,” the statement added.
“It has to be said that the above discussion is made in the context of the IT framework that BoG signed on to since 2007.”
The release by the Director of Research at the IEA, Dr. John Kwakye noted, "I have argued previously — and repeat now — that in the Ghanaian context, a more comprehensive approach going beyond the IT framework is needed to stem inflation on a durable basis."
"In particular, BoG should engage with Government and relevant agencies to target directly the key sources of inflation pressures, in particular, fuel, food, transport, and the exchange rate. The country should be prepared to mitigate oil price shocks that may occur due to geopolitical developments."
"This should require that BOST maintain strategic oil reserves that could be released to cushion pump prices in the midst of shocks."
Dr. John Kwakye, Director of Research-IEA
