BoG pauses policy rate despite inflation scare

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Despite surge in inflation in recent months prompting expectations of another increase in policy rate, the Monetary Policy Committee (MPC) of the Bank of Ghana has, in an unexpected turn of events, pressed the pause button on the rate increment.

Despite surge in inflation in recent months prompting expectations of another increase in policy rate, the Monetary Policy Committee (MPC) of the Bank of Ghana has, in an unexpected turn of events, pressed the pause button on the rate increment.

The MPC in its 107th meeting decided to maintain the policy rate at the current 19 percent against analysts forecast that the rate be increased by, at least, a 100-basis points due to harsh global and domestic conditions which have pushed inflation to 18-year high – 29.8 percent in June from 27.6 percent in May.

Providing justification on why the committee decided to halt the rate, Governor of the Bank of Ghana, Dr. Ernest Addison, said though inflation is on upward trend, the rate of increase is slowing, hence, the need to monitor developments further.

“The committee noted that inflation has persisted on an elevated path. A detailed review of the consumer basket shows that although initially driven by supply side shocks, the initial relative price changes have broadened to almost all the items in the consumer basket. Over 80 percent of the items in the basket recorded inflation above 20 percent.

“Inflation perceptions and expectations, as revealed in the bank’s surveys of consumers and businesses, have increased and influenced agitations for Cost-of-Living Allowances in workplaces. The Bank of Ghana has responded decisively with its policy tools over the last few months increasing the policy rate by a cumulative 550 basis points since November 2021, and tightened liquidity conditions.

“The committee also noted the deceleration in the rate of increase in inflation in the last reading. The committee expects that the macroeconomic framework that will underpin an agreed International Monetary Fund (IMF)-supported programme will present a stronger coordinated monetary and fiscal policy framework that will anchor stability and prevent a wage-price spiral which will lead to inflation becoming more entrenched.

“Based on the above assessments, the committee was of the view that it will be appropriate to pause and observe the impact of the recent monetary policy measures already taken,” the MPC said in its report.

Prior to the MPC’s decision, it had raised the rate cumulatively by as much as 550 basis points since November 2021, with a 200 bps rise at its last meeting in May to 19 percent.

The Institute of Economic Affairs was of the view that an increase by, at least, 100 basis points would have signaled to the market that the central bank is committed to taming the out-of-hand inflation. “Taking all the foregoing factors— both known and unknown— into consideration, we are minded to suggest that the MPC should increase the MPR by a further 100 to 150 basis points… This adjustment will narrow the inflation-MPR gap, although the real MPR will still remain negative.

The next meeting of the MPC in September, when the committee would have had the benefit of two more inflation readings in July and August, would give it a clearer sense of the trend for it to reposition the MPR accordingly,” Director of Research at IEA, Dr. John Kwakye, stated.

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