By Morris Ogbetey
Ahead of the Bank of Ghana’s Monetary Policy Committee (MPC) meeting next week, the Institute of Economic Affairs (IEA) expects the central bank to hike the policy rate by 100 basis points, from the current 27 percent to 28 percent.
Despite a 10-percentage-point reduction in the Treasury Bill rate over the last couple of months, the institute perceives an existing elevated risk to inflation that needs urgent attention.
According to economist Dr. John Kwakye of the IEA, “My consideration of the several foregoing competing factors leads me to the conclusion that the balance of risks in Ghana currently lies more with inflation than economic growth. I am, therefore, inclined to expect the MPC to go for a hike in the policy rate by 100 basis points from 27.00% to 28.00%.”
He explained that this decision should send a clear signal to the markets about the committee’s commitment to decisively tackle inflation and bring it under control in the foreseeable future. He also believes that raising the policy rate would help anchor inflation expectations while countering second-round effects from supply and cost drivers of inflation, particularly in the areas of food, energy, and transportation.
Dr. Kwakye emphasized that targeting these supply and cost drivers would help ease pressure on the policy rate.
The dilemma of the central bank
As the MPC meets next week, it will once again face the difficult decision of determining the appropriate policy rate to balance inflation control and economic growth.
While economic observers have long hoped for lower interest rates to reduce the cost of credit and stimulate investment and growth, Dr. Kwakye believes that such an outcome is unlikely at the MPC’s next meeting due to the current uncertain economic environment.
On one hand, economic growth appears to be improving, signaling an initial phase of economic recovery. However, on the other hand, inflation remains high, and despite the recent relative stability of the exchange rate, it remains vulnerable.
The vulnerability of the exchange rate has been exacerbated by a sharp drop of over 10 percentage points in Treasury Bill rates in recent weeks, raising concerns that investors may shift to foreign exchange as a safer alternative.
Dr. Kwakye advised that avoiding a further sharp decline in Treasury Bill rates would help prevent excessive divergence from other money market rates and mitigate potential capital flight.
