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MPC Commences Meetings Today, IEA Calls For 200 Basis Points Hike In Policy Rate

M.Cby M.C
May 18, 2022
Reading Time: 4 mins read
M.Cby M.C
in Economy, One Top Story
0
MPC Commences Meetings Today, IEA Calls For A 200 Basis Point Hike In Policy Rate

Monetary Policy Committee of the Bank of Ghana

The Monetary Policy Committee (MPC) of the Bank of Ghana (BoG) will commence its 106th Regular Meetings today, Wednesday, May 18, 2022 to review developments in the economy.

The 3-day Meetings, which will end on Friday, May 20, 2022, will be concluded with a press conference on Monday, May 23, 2022 to announce the decision of the Committee.

The Monetary Authority will face a tough choice: support economic growth or tame runaway inflation which has since risen to a 19-year high of 23.6% in April, 2022. The massive jump in inflation was just after the MPC hiked the Policy Rate (PR) by 250 basis points to 17% in its previous meetings in March this year amid rising inflationary pressures.

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Dr John Kwakye Director of Research at Institute of Economic Affairs IEA
 Dr. John Kwabena Kwakye, Director of Research at the Institute of Economic Affairs 

In its latest projections ahead of the meetings, the Institute of Economic Affairs (IEA) stated that going by the principle underlying the Inflation Targeting (IT) with current inflation and future outlook being so elevated, the immediate response by the BoG should be to tighten monetary policy by raising the PR.

“The obvious question is by how much should the BoG raise the PR? The factors that should determine the PR adjustment include the wide gap between the PR (17.0%) and inflation (23.6%)”.

IEA

The IEA also cited the policy tightening by major central banks, which increases the risk of foreign currency outflows from developing and emerging market economies, as another reason why the policy rate should be increased. The IEA indicated that the act by these major central banks could put renewed pressure on the cedi.

As such, the economic and policy think tank stated that “taking all of these factors together, it may be surmised that the PR should be raised by another 200 basis points to 19.0%. This will help narrow the gap with inflation and also ease to some extent the risk of foreign currency outflows”.

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Dr. Ernest Addison – Governor of the Bank of Ghana

According to the IEA, the adjustment will also provide some assurance to the markets that the BoG is committed to addressing the resurging inflation but “anything less than this, may be interpreted as a weak response which may be concerning to the markets”.

The IEA stated that the Central Bank must buttress its decision with an effective communication strategy to make its intentions clear so that it can rally the markets behind the decision.

Inflation Targeting framework not fit for Ghana’s context

The IEA further noted that “It is known, however, that in the Ghanaian context, the transmission of the PR is constrained by an under-developed and less-responsive financial sector”.

“But even more important is the fact that Ghana has a long history of inflation with strong supply or cost undercurrents, in particular, food, fuel and the exchange rate. Therefore, as an essentially demand-management tool, the IT framework is less suited to Ghana’s type of inflation. It is more suited to mature economies where inflation tends to be more demand-driven”.

IEA

The IEA also urged the Bank of Ghana to engage with government and relevant agencies to target directly the key sources of inflation pressures, in particular, fuel, food, transport and the exchange rate.

The economic and policy think tank called for immediate steps to mitigate oil price shocks that may occur due to geopolitical developments. “This should require that BOST maintain strategic oil reserves that could be released to cushion pump prices in the midst of shocks”, it stated.

Other key policy interventions

Additionally, the IEA advised government to use some of its windfall earnings from higher oil prices to cushion domestic prices and also suspend or reduce some of the numerous fuel taxes and levies amidst oil shocks.

In terms of exchange rate stability, the IEA pointed out that it is necessary to leverage capacities and opportunities for earning foreign exchange, including through greater processing of export commodities and increasing earnings from natural resources.

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To address the rising food prices, the IEA noted that it’s necessary to increase production and ensure storage and preservation of excess produce especially, during the peak seasons so that buffer stocks may be released to cushion prices amidst shocks and during the lean seasons.

Furthermore, the IEA called for improvement in the public transport system and the availability of intra- and inter-city public transport system which should be subsidized to cushion the masses that mainly use it.

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