The Director of the Institute of Statistical, Social and Economic Research, Professor Peter Quartey, has commended the Bank of Ghana for its role in fighting inflation and ensuring a relative stability of the cedi, despite the challenges facing the economy.
According to him, the fiscal policy of the central government has failed to live up to expectation, a situation which has pushed inflation high and created some instability within the Ghanaian economy.
“So far, the Bank of Ghana has served us very well, but it cannot be only monetary policy. The current challenges we find ourselves also requires fiscal policy addressing inflation. You will find that monetary policy has always been used with fiscal policy in order to achieve the targeted growth and stability in our exchange rate that we desire”, he disclosed this at the Absa Bank-UPSA Law School Quarterly Banking Roundtable on the topic “Monetary policy, Central Bank leadership and the stability of the cedi”.
“The COVID-19 pandemic has also brought new dimensions. We’ve seen central banks adjusting policy rates, central banks adjusting reserve requirements, prudential regulations and so on and so forth to ensure we recover from the pandemic. However, one thing that we normally find is the kind of conflict between politicians and the central banks because the politician wants to see growth, reduction in unemployment whilst the central banks always want to ensure some stability. So sometimes, there is this conflict that is why the central bank independence is very critical”, Professor Quartey explained.
“Once the central bank is independent, then this issue of politicians trying to sway monetary policy in their direction might not work. Independence we can say of the UK where the Central Bank Governor’s position is advertised and the one selected had to go through some interviews ,whereas in our case is the opposite”, he said.
Nevertheless, Professor Quartey, pointed out that whenever there is a rule based monetary policy this issue of independence is sustained.
“So in our case you find that the central bank is using inflation targeting that is a rule based approach. The rule is when you see overheating, you see exchange rate moving in certain direction, then the central bank has no option to intervene. So that is devoid of any political intervention, and it avoids the time inconsistency and policy reversal. And that is what we have with our central bank so far”.
BoG dismisses misconception that Inflation Targeting framework has failed
Meanwhile, the Bank of Ghana has out rightly dismissed the misconception that it’s Inflation Targeting (IT) framework has failed to be effective.
According to the Director of Research, Dr. Philip Abradu-Otoo, the framework is the best tool so far for keeping inflation low.
Many market watchers have questioned the viability of the IT framework because the rate of inflation keeps rising, despite the increase in the Central Bank’s key lending rate.
But Dr. Abradu-Otoo disagrees.
Speaking also at the Absa Bank-UPSA Law School Quarterly Banking Roundtable, he said “the IT framework has three main elements; we have an institutional framework, operational framework and then transparency and accountability framework. Is the current inflation targeting mechanism effective, I’ll say emphatically yes because if you compare inflation performance under the IT regime compared to these two other regime, I said the volatility in inflation under the IT regime has been very very very minimal”.
“Except of what we have seen in previous times regarding the impact of all these shocks, beginning from when we got out of COVID-19 and this Russian-Ukraine war and then the pass through of the decisions made by other central banks elsewhere, which is causing capital flights and causing our exchange rate to move which is feeding into inflation etc”, he said.
“Apart from that if you look at the history of inflation targeting framework you will realised that inflation performance under the IT framework has been sound. We address the inflation challenge with growth in mind”, Dr. Abradu-Otoo added.
Financial players concerned about rising interest rates
Jacob Brobbey, Ag Head of Markets at Absa Bank, for his part expressed concern about the use of Inflation Targeting framework at this time of challenges in the global economy to fight inflation.
According to him, this has pushed interest rates so high, citing an example of the rate of the 91-day Treasury bills moving from 13% in March 2022 to about 24% in June 2022.
“Those of us in the financial sector or the banking industry, I think there are lots of questions on our minds given the high levels of inflation we are seeing across the globe. Inflation is high in USA, UK; Ghana here we are in the 18-years high. The questions that come to mind is that will our central banks across the world chase inflation and if that is the case what is going to happen to interest rates.”
“Currently, we have seen interest rates, example the 91-day Treasury bills for instance moved from 13% in March 2022 to around 24% currently. So the question is, is that a sustainable path for the country to take and at what point is also the policy side coming in.
The roundtable assessed the implications of external economic conditions and geopolitical developments on the Ghana cedi, and predictive interventions that ought to be put in place to stabilise the currency.
It also delved into the parameters of the independence of the Bank of Ghana and its role in moderating the stability of the cedi.
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