In the ongoing fight against inflation, many central banks often deploy their most potent weapon – raising interest rates.
For instance, the Bank of Japan which has traditionally favored negative interests has now shifted gears to the neutral zone or zero interest rates.
Central banks use interest rate hikes to combat inflation because raising rates makes borrowing more expensive, which reduces consumer spending and business investment, thereby slowing economic activity and curbing price increases.
This approach also encourages saving, as higher interest rates offer better returns on savings accounts and other fixed-income investments.
Besides interest rate adjustments, central banks employ other tools such as open market operations, where they buy or sell government securities to influence the money supply.
Also, central banks use reserve requirements to dictate the amount of funds banks must hold in reserve, thus controlling the amount they can lend.
In recent events, the Bank of Ghana (BoG) has reaffirmed its strong commitment to maintaining price and financial stability, countering claims that it would intentionally keep interest rates high to boost profits.
This declaration comes at a time of high inflation and the challenging task of balancing efforts to control rising prices with the need to support sustainable economic growth.
According to the Director of Communications at BoG, Mr. Bernard Otabil, “Bringing inflation down to the target level is a precondition for achieving sustainable economic growth and, over the long-term, ensuring economic prosperity in Ghana and increasing the welfare of the population.”
The Bank of Ghana’s decision to maintain steady interest rates despite inflationary pressures has led to speculation that it might keep borrowing costs high to generate profits.
However, Bernard Otabil denied these claims, stressing that central banks are not commercial entities driven by profit motives.
“Anyone who would make such a claim perhaps does not fully understand central banking because high interest rates are inimical to the operations of central banks.
“High interest rates raise the cost of open market operations and lead to substantial losses.”
Bernard Otabil
He emphasized that central banks are mandated to ensure low and stable inflation for the public good, even if this results in financial losses.
“Central banks, by the nature of their work, are supposed to provide a public good, and that public good is low and stable inflation, which comes at a cost.
“Indeed, a central bank can incur losses, have negative accounting equity, and still function effectively — a loss does not imply a loss of policy effectiveness.”
Bernard Otabil
Price Stability The Goal
Mr. Bernard Otabil affirmed that the Bank of Ghana’s mandate is to achieve price stability and it cannot trade off this objective for profits.
“However, it is essential to recognize that central banks are mandated to provide the public good of low and stable inflation and cannot trade off the policy objective of stable inflation for profits,” he said.
The Bank of Ghana remains dedicated to combating inflation, as indicated by its latest survey showing stable future inflation expectations across banking, consumer, and business sectors. However, both global factors and domestic pressures continue to present challenges.
Globally, inflation has eased, driven by falling food and energy prices and stringent monetary policies. Yet, in Ghana, persistent tight labor markets and the lingering effects of currency depreciation have kept inflation pressures high.
Mr. Otabil recognized the complexity of monetary policy and emphasized the importance of humility in addressing economic uncertainties.
“The unique nature of central banks is that sometimes losses are the price they pay for meeting objectives — ensuring stable prices, keeping the financial system safe and stable, and supporting growth. We perform monetary policy operations with humility because the economy is not deterministic.”
Bernard Otabil
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