US-based Ghanaian Assistant Professor of Economics, Dr. Dennis Nsafoah, is warning of a slowdown in the country’s economic growth and an anticipated increase in unemployment.

This is a result of the recent 2.5% increase in the Bank of Ghana’s policy rate to 24.5%.

According to him, the increase in the policy rate will push the cost of borrowing up and possibly drive down investment spending by many private businesses in the economy.

Dr. Nsafoah who is with Niagara University told Joy Business an increase in the policy rate will be less beneficial especially when one expects aggregate supply to return to normal levels.

“A 2.5% increase in the policy rate can be costly to households and businesses. It will increase the cost of borrowing and possibly drive down investment spending by many private businesses in the economy. For an economy which is currently facing several other challenges (including high inflation and currency depreciation), the increase in policy rate may slow economic growth and increase unemployment”.

He, however, said the Bank of Ghana like many central banks around the world is facing the tradeoff between price stability and economic growth in the sense that, most economists generally agree that at least in the short run, a monetary policy decision which decreases inflation will also decrease economic growth.

“For the Bank of Ghana, choosing between price stability and economic growth is not really a big conundrum. The primary objective of the Bank of Ghana is to maintain stability in the general level of prices, as stated under section 3 of the Bank of Ghana Act 2002, (Act 612)”, he added.. 

Is increasing the policy rate the solution to a cost-push inflation? Dr. Nsafoah responded by saying both ‘Yes’ and ‘No’.

He stressed that central banks do not respond to supply side shocks when they occur in the economy because they are often transitory and do not last. Therefore, an increase in the policy rate to deal with excess demand caused by a decrease in supply will be less beneficial especially when one expects aggregate supply to return to normal levels.

However, he opined that when there are successive supply shocks which appear to have a permanent and lasting effect on the economy like “we have seen in the inflation data presented by the Ghana Statistical Service (GSS), then an increase in the policy rate is a solution. By increasing the policy rate, the Bank of Ghana can slow down aggregate demand to give aggregate supply time to catch up”.

Furthermore, he said “we believe inflation in Ghana is gradually peaking. The Bank of Ghana in their previous monetary policy report estimated inflation to peak in the last quarter of 2022. The disinflation seen in the monthly inflation data is also a good indication that inflation is peaking. However, there are still significant risks to the inflation forecast especially from the pass-through of currency depreciation”.

The policy rate cumulatively has increased by 10% year to date. The 2.5% increase is the largest aggregate policy rate increase in a calendar year since 1992.