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Economist Advises Government to Stop Depending on Monetary Policy Rate Alone to Fight Inflation

M.Cby M.C
January 31, 2023
Reading Time: 3 mins read
M.Cby M.C
in Economy
0
Bank of Ghana Goes Hawkish, Hikes Monetary Policy Rate By 150 Basis Points

Dr Ernest Addison, Governor of BoG

Professor Lord Mensah, a lecturer at University of Ghana, has advised the government of Ghana to stop depending on Monetary Policy Rate (MPR) alone in fighting inflation inflation, but look for other alternative ways in curbing inflation.

Commenting on the new policy rate announced by the Bank of Ghana, Prof Mensah, noted that the government should look at the fiscal discipline– how the government spends rather than target the expenditure in a way of producing food.

“You can also spend in ways of getting food to the market which ultimately results in getting cheaper prices of food in the economy. If you look at the inflation aggregation you can see that it is food that is leading together with transport. So with all these put together it tells you that if we spend in a prudent way it will have a way of controlling our inflation.

“It is a system that is being managed; you shouldn’t look at it from one side. Day in and day out, I keep on drumming that economic theories have moved away from inflation being managed by just increasing monetary policy and all that.”

Professor Lord Mensah

The economist is meanwhile doubtful about interest rate dropping, saying that “with the way the government is managing the economy, interest rate will not come down anytime soon”.

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“The consequences will be that inflation will always be on the high side and it will deny the private sector the kind of funds they need to grow the economy. Because the private sector will be competing with the government and instead of the Central Bank to channel the funds through the banks to get to the private sector they will prefer directing it straight to the government.”

Professor Lord Mensah

Hike in MPR

Meanwhile, the Monetary Policy Committee (MPC) of the central bank has further raised the policy rate by 100 basis points to 28 percent from 27 percent, in an effort to drive inflation onto a downward path.

Governor of the Bank of Ghana (BoG) and Chairman of the MPC, Dr. Ernest Addison, announcing the MPC’s report said the MPC sees the need to remain vigilant and moderate liquidity in the system to underpin macroeconomic adjustments taking place to drive inflation down. “Under the circumstances, the Committee decided to increase the policy rate by 100 basis points to 28 percent,” he said.

During 2022, the BoG cumulatively increased the benchmark policy rate by 1,250 basis points to 27 percent – the highest in almost 2 decades, as the MPC remains resolute in its stance through Q1-2023 until inflation shows signs of moderation and implementation of other available monetary tools to control money supply and rein-in inflation.

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Although the central bank expects inflation to peak in Q1-2023, Governor Addison noted it sees inflation returning to the medium-term inflation target band of 8±2 percent in the next four years, amid the International Monetary Fund (IMF) programme.

“We are focused on our mandate, and trying as much as possible to make policy decisions which help bridge the inflation gap. In that context, direction of inflation is not only going to be determined by the policy rate but a whole lot of other factors – including the macroeconomic framework which we have described.

“If you look the timeframe, we’re looking at three to four years. This is what the IMF programme is designed to do. During that timeframe, we expect to bring inflation down to the target of a single digit, thus a medium-term inflation target band of 8±2 percent. So, this is really the objective of monetary policy over the next three to four or five years.”

Dr. Ernest Addison

READ ALSO: Nigeria Experiences Cash Shortage Amid Redesigned Currency Swap

Tags: Bank of GhanaInflation Ratemonetary policy rateMPCProfessor Lord Mensah
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