The International Monetary Fund (IMF) and Fitch Solutions have both forecasted end-year inflation to moderate at an average rate of 8.7 percent and 8.5 percent respectively, slightly above the central target of 8 percent.
Relative to the inflation rate at year-end 2020 (10.4%), these forecasts indicate a bit of ease for households in terms of their purchasing power (i.e. the value of a currency in terms of the amount of goods and services one can buy) and also reduces the cost of borrowing for businesses and people needing loans.
Thus, it remains a major indicator for measuring the health of an economy and it’s important to the Central Bank’s decision of pegging the monetary policy rate — the rate at which the Central Bank lends to Commercial Banks.
These notwithstanding, renewed waves of the COVID-19 virus and its associated economic constraints may spiral inflation rate again and thus, thwart the possibilities of improving people’s standard of living, ending the year with a high rate. With hints of going back into a lockdown, these expectations may not be realized.
Amid these likely circumstances, the Central Bank is also being pressured by the business community to reduce the policy rate in order to further reduce the lending rates of commercial banks.
This comes at a time when the Central Bank’s monetary policy committee is meeting to set the policy rate, with today, January 29, 2021 marking the last day of the meeting.
Speaking in an interview with the Vaultz News, Prof Gatsi hinted that in reducing the policy rate, the Central Bank risks setting aside macroeconomic indicators. Therefore, the only possible action should be to maintain the policy rate at current levels.
He argued that, the Central Bank sacrificed monetary policy in 2020 and did not consider economic indicators, just so that it will reduce the impact of the pandemic on businesses and ensure that funds were available for businesses to operate— most notably the reduction of interest rates.
“Because, if you go and cut down the monetary policy rate, without adherence to the development of indicators within the macro space and external development, we may actually find ourselves in trouble.
“So, I am not expecting that we are going to reduce the policy rate, because inflation has started going up, and the exchange rate is not as stable as we expect. If you look at our fiscal indicators they are also very uncomfortable.
“…my expectation will be to tackle the indicators that will cause you to reduce the interest rate or to increase the interest rate. If you are able to deal with those indicators, then you will have your way clear as to whether going forward, the interest rate in terms of lending rates will go down.
“So, when you look at all those things, I believe the best thing to do is to maintain the policy rate. If we are going to reduce the policy rate, then it means that it is not driven by the indicators.”
Conditions unripe for reduction of inflation target
Prof. Gatsi also suggested that it is unlikely for the Central Bank to reduce the inflation band of 8% +/-2 for this year. He believes that statistical data has not given us the indication that there is a need to reduce the target.
He however stressed that, the real economic road map for the economy will be set in March, when the full year budget and economic policy management will be announced to the country and that is when there may be the need to readjust the band or not.
“…what we are dealing with now, the 8%+/-2, that was the 2020 target, and what was read for the first quarter of 2021 is just a constitutional provision to allow for expenditure to take place while the government is being formed.
“… when the government is formed, I believe the economic growth rate for 2021, going forward will be reactivated and we will know whether there is a need to change the band.”
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