Current uncertainties surrounding energy prices and food prices, coupled with rising global and local consumer inflation, have led to some investment analysts predicting an increase in the Monetary Policy Rate (MPR) by the Bank of Ghana (BoG) within Q1 of 2022.
But Financial Analyst and Director of Business Operations at Dalex Finance, Joe Jackson, has said an increase in MPR will not be the best solution to the rising domestic inflation rate; since the market is experiencing what is termed ‘cost-push inflation’, which is largely caused by a rise in the factors of production.
While it might provide a short-term solution, he said, increasing the MPR could derail recent gains and could lead to a decrease in output and shrink the GDP.
Mr. Jackson cautioned that even though there is pressure on the BoG to raise rates due to the recent inflationary trend, such a move would be a knee-jerk reaction and counter-productive.
“The current development is, to a large extent, because of factors arising from the pandemic. An increase in the MPR will not solve the problem. What we are experiencing is largely cost-push inflation; it is caused by a decrease in aggregate supply resulting from bottlenecks and increases in the cost of production of goods and services,” he indicated in an interview with the B&FT.
Stark reality
The financial analyst added that ideal recommendations, including fiscal tools aimed at increasing aggregate supply such as tax rate reductions and production subsidies, cannot be countenanced at this point in time, owing to the state of government finances.
“We all need to be concerned because the challenges of government finances mean that a typical response to supply-push inflation cannot be pursued,” he remarked.
Mr. Jackson warned of tough times ahead for the private sector due to increased cost of production inputs and increased demand from labour for more pay.
In the face of escalating food and energy prices, weakening currency, marginal salary adjustments, the citizenry are being advised to tighten their belt because it is going to be a tough year – adding that the country will, collectively, have to take tough decisions because the public coffers are under real pressure.
He added that similar conversations will be had annually to little effect if there is not a concrete commitment – devoid of sectarianism – to change the economy’s structure.
“We must be looking at improving the agriculture value chain performance, as well as improving general efficiency by deepening digitisation,” he noted.
