Economist Dr. John Kwakye has urged the Monetary Policy Committee (MPC) of the Bank of Ghana (BoG) to significantly reduce the current 29% policy rate.
According to Dr. Kwakye, there is no valid reason for the MPC to maintain the rate at such a high level.
“There can be no justification for BoG to hold on to its [policy rate] PR of 29%, described by the IMF as the highest in real terms in South Sahara Africa.”
Dr. John Kwakye
“The MPC must slash the policy rate drastically by at least 250 basis points. The PR isn’t the solution to the current inflation with strong supply undercurrents,” the Director of Research at the Institute of Economic Affairs (IEA) wrote on X ahead of the 118th MPC press conference scheduled to take place on Monday, May 27, 2024.
“According to the IMF, Ghana has the highest real Policy Rate in Sub-Saharan Africa.
“This is unacceptable and strangulating the economy. With inflation dropping sharply from 54% at end-2022 to 25% at end-April 2024, BoG must slash its PR drastically from the current level of 29%.”
Dr. John Kwakye
The BoG maintained the policy rate at 29 percent at the 117th MPC press conference in Accra on Monday, March 25. Chair of the Committee Dr Addison announced at a press conference that although the inflation rate dropped marginally, the MPC decided to further monitor the trends hence the decision to maintain the policy rate.
“The committee therefore decided to maintain the policy rate at 29 %,” he said.
In April, Ghana experienced a slowdown in inflation due to a favorable base effect from last year, which tempered the rate of price increases following a period of currency depreciation and higher fuel costs.
Inflation Dips Slightly, BoG To Hold Rates
According to Government Statistician Samuel Kobina Annim, inflation increased by 25% annually last month, down slightly from 25.8% in March.
This announcement was made during a press briefing in Accra on Wednesday, May 8, 2024. The median estimate from a Bloomberg survey of three economists was 25.2%.
Despite the deceleration in inflation, Bloomberg has stated that the Bank of Ghana is expected to act cautiously and again leave its benchmark interest rate unchanged at 29%.
Central banks mostly use high interest rates as a tool to tackle inflation primarily because it can help moderate consumer spending and investment, which in turn can reduce the overall demand for goods and services in the economy.
When a central bank raises interest rates, it becomes more expensive for businesses and consumers to borrow money. Higher borrowing costs discourage spending on big-ticket items like homes and cars, as well as business investments.
This reduction in spending helps to slow down the overall demand for goods and services in the economy.
Additionally, higher interest rates can also attract foreign investment into the country, as investors seek higher returns on their investments. This increased demand for the domestic currency can strengthen its value relative to other currencies.
A stronger currency can have a dampening effect on inflation by making imports cheaper, which can in turn reduce the cost of goods and services.
Moreover, central banks use interest rate hikes as a signal to the public that they are committed to controlling inflation. This action can influence consumer and business expectations about future price increases, which in turn can impact actual inflationary trends.
However, it’s important to note that high interest rates also have potential downsides, such as slowing economic growth and increasing the cost of borrowing for businesses and consumers.
Therefore, central banks must carefully balance the need to control inflation with the potential impact on overall economic activity and employment levels when deciding on interest rate policies.
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