The Bank of Ghana may increase the policy rate for the third consecutive time this year, following the increase in inflation rate to 29.8% in June 2022.
According to Assistant Professor of Economics at Niagara University in New York, USA, Dr. Dennis Nsafoah, he expects the policy rate to re-anchor markets expectation of the near-term inflation rate.
“The broad-based nature of the inflation rate increases the pressure on the Monetary Policy Committee (MPC) of the Bank of Ghana ahead of their next policy rate decision on July 25th to increase the policy rate for a third time this year. In as much as there is evidence of external factors such as the war in Ukraine and continued supply chain disruptions driving inflation in Ghana, a broadened inflation also indicates excess demand in the economy”.
Dr. Nasfoah pointed out that an increase in the interest rate will help slow demand and allow supply time to catch up, adding, “in January 2004, when the inflation rate was 29.0%, the policy rate stood at 21.5%, representing a real interest rate of -7.5%. With the current policy rate of 19%, history indicates the Bank of Ghana may further increase the policy rate to re-anchor inflation expectations and to prevent high inflation from becoming entrenched.”
MPC may decide to maintain policy rate at 19%
On the other hand, he said the MPC may decide to stay on the sidelines and maintain the policy rate at the current level of 19%.
According to him, there are two main reason to explain such a decision.
“First, the MPC has already increased the policy rate by 550 basis points since November 2021. Most economists estimate that it takes an average of about 12 months for a monetary policy decision to be fully transmitted to the economy. In view of this, Ghana’s economy is yet to fully realise the full implications of the previous policy hikes”.
“In addition, the June inflation of 29.8% is also within the Bank of Ghana’s forecast and may have already been anticipated in the previous policy rate hike of 200 basis points.
Furthermore, Dr. Nsafoah said whether the MPC decides to maintain the policy rate or increase it, “we expect the next policy rate decision to do a good job of re-anchoring markets expectation of the near-term inflation rate”.
In the absence of (or in addition to) a decisive policy rate hike, the US based Associate Professor said the MPC should communicate the future path of the policy rate, adding, “if the Central Bank could share with the public what it considers as the neutral interest rate (the rate at which monetary policy is neither accommodative or contractionary), it would guide markets and anchor expectations around the inflation target”.
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