Professor Peter Quartey, Senior Economist and Lecturer at the University of Ghana, has said that the IMF’s recommendation for the Bank of Ghana (BoG) to further tighten monetary policy to curb inflation cannot achieve its purpose.
Even though the IMF expressed satisfaction about the progress managers of the economy has made and approved a third disbursement of US$114.6million under the country’s three-year aid programme, the Fund raised concerns about the rising inflation.
“To help bring inflation down toward its medium-term target, the Bank of Ghana (BoG) should stand ready to further tighten monetary policy if inflationary pressures do not recede as expected,” the Fund said in a statement.
However, in an interview, Prof. Quartey said the central bank should study the economy and develop a new strategy that will rather reduce the policy rate in order to make credit more accessible for the private sector to produce more goods and services so as to arrest the inflation problem.
“Inflation is caused by several factors such as demand and supply forces.The demand side is where the demand for goods and services outstrips supply. In other words, more money will be chasing few goods. Over the years, government has been tightening monetary policy to tackle the demand side by increasing interest rates to mop up excess liquidity in the system.
“But it has not worked, because when the policy rate increases the banks are quick to also increase their interest rates. This prevents businesses from accessing loans to produce more, thereby creating shortage of goods and services. So no matter how you tighten the system, you will not be able to correct the problem,” he said.
According to Prof. Quartey, reducing the monetary policy rate would help arrest the inflation better than increasing it, since it would increase access to capital and reduce the cost of doing business in the country — which will enable firms to produce more and increase the supply of goods and services in the economy.
“That is why I am with the view that the central bank also looks at the supply side. It can sometimes reduce interest rates to ensure the private sector has access to credit, and when that happens they will produce more and there will be more goods in the market to counteract any inflationary effects as a result of any liquidity in the system.
“So there is need for the central bank to study the system and look at all these factors and come out with appropriate policies, rather than hiking the policy rate — which does not help address the supply side because of cost of credit goes up and businesses suffer and are not able to produce more,” he said.
“The central bank has the fear that if you reduce interest rates there will be capital flight because most of the money is borrowed from external forces; people will borrow their money from the system and that can affect the exchange rate. But before you can draw that conclusion, you need to undertake a study to know the likely effect so you know the right strategy to take; but the situation whereby policy rate is increased all the time is not the best solution in my view,” he added.
The current inflation rate of 17.7 percent announced by the Ghana Statistical Services (GSS) shows that both government and the Bank of Ghana have clearly missed their inflation targets for 2015, latest figures released by the Ghana Statistical Service have shown.
While government projected an end-year revised inflation target from 11.5 percent to 13.7 percent for the year, the Bank of Ghana forecasted 8 percent +/-2, which was later revised to 13.5 percent. The new inflation rate, however, is the highest recorded since July 2015, which affirms concerns that the central bank’s approach to tackling inflation is not working.