An Economist has predicted that national year-on-year inflation will exceed 40% this year because the inflationary pressures that are already set into motion will continue for the rest of the year.
Dr. Kwadwo Opoku, a Research Fellow at the Centre for Social Policy Studies (CSPS) at the University of Ghana, indicated that per “my little projection”, inflation will reach the peak around February next year before it starts declining. He underscored that should the Bank of Ghana’s measures yield any results, then inflation may end 2022 around 41% or 42%.
Commenting on the Central Bank’s previous monetary policy measures, Dr. Opoku noted that he did not agree with the MPC’s decision to hike the policy rate to 22% and also increase the minimum requirements.
He explained that these measures come at a cost on output and employment. More importantly, the Economist iterated that most of the price pressures that the country currently battles are not demand-driven.
“I agree they really need to do something about it but from my perspective, I think it is not necessary because it’s not increase in demand. Usually, the reason why the MPC has been increasing the policy rate is to fight the depreciation of the Cedi. Now, it’s a little bit stable because you fight inflation at the cost of output and employment”.Dr. Kwadwo Opoku
As a result of the previous policies rolled out by the Central Bank to contain galloping inflation in the country, Dr. Opoku noted that banks are constantly complaining of liquidity constraints. Thus, banks are lamenting that they do not have enough resources due to the increase in the reserve requirements.
Policy rate should be maintained
Sharing his expectations ahead of the upcoming Monetary Policy Committee (MPC) meetings, Dr. Opoku highlighted in an interview with the Vaultz News that the impacts of the previous hawkish policy measures by the BoG are yet to be fully realized.
He, particularly, stressed the impacts on credit to the private sector because “every month, the reserve requirement ratio increase” hence, “of course, the decision that they took previously is still having impacts”.
“I think they should just maintain the policy rate. Even though I did not agree with them with that previous policy, I think they should have stayed put because many of them [inflationary pressures] were coming from outside.
“I don’t think they will continue to increase the rate to constrain further the output gap, I don’t think they will do that. I think the best decision is to stay put and see what can be done with regards to inflation but of course, in the short to medium term, we expect inflation to rise up to February next year.”Dr. Kwadwo Opoku
Ghana’s inflation rose for the 14th consecutive month and to a 21-year high in August 2022. At 33.9%, the gap between inflation and the policy rate (22%) remains wide and negative. This means investors are facing negative returns on the purchase of government of Ghana bonds.
With the 108th MPC meetings starting from September 20, it remains quite unclear whether the Committee would keep the rate unchanged or increase it to demonstrate its commitment to fighting rising inflation in the country.