The Institute of Economic Affairs (IEA) has questioned the effectiveness of the Policy Rate, (PR), saying, the PR is artificially high and has not been effective in controlling recent inflation.

In its Economic Outlook for July and August 2024, it said inflation has declined by 33.2 percentage points from 54.1% to 20.9% between December 2022-July 2024, yet, over the same period, the PR has been cut by a minuscule 1.0 percentage point.

“The huge disparity between the declines in inflation and the PR suggests a disconnect between inflation and the PR. The PR is artificially high and has, in and of itself, not been effective in controlling recent inflation, which, as we explained under Section 2.2, has been fuelled largely by supply and cost factors that are not easily amenable to the demand-based PR”.

“Indeed, the IMF [International Monetary Fund] recently described Ghana’s PR to be the highest in real terms in Sub-Saharan Africa (SSA). This implies that Ghana’s monetary policy stance has been unusually tight. Ironically, Ghana’s inflation has also been among the highest within Sub-Saharan Africa, pointing to the ineffectiveness of our monetary policy”, it added.

Continuing, the IEA said it is appropriate that the Monetary Policy Committee cuts the PR by at least 200 basis points to reflect the sharp decline in inflation.

“However, we know that the MPC is constrained under the ECF [Economic Credit Facility] to maintain a tight monetary policy stance. As such, the MPC is not likely to cut the PR by more than 100 basis points. As we suggested under Section 2.2, fighting Ghana’s current inflation requires targeting directly the supply and cost drivers through a collaborative effort between the Bank of Ghana and the government”

The Bank of Ghana left its benchmark monetary policy rate steady for a third consecutive meeting at 29% on July 26th, 2024, citing concerns about inflationary pressures due to strains on the currency