By Cindy Bempong ODAME
Inflation targeting is a monetary policy strategy where a central bank sets an explicit inflation goal and uses interest rate adjustments to achieve it. Ghana’s inflation target is 8% ±2%, meaning the Bank of Ghana aims to keep inflation between 6% and 10%.
The mechanism follows a straightforward principle:
- If inflation rises above the target, the Bank of Ghana through the Monetary Policy Committee increases interest rates to reduce excess demand.
- If inflation falls below the target, the Bank of Ghana through the Monetary Policy Committee lowers interest rates to stimulate economic activity.
In theory, this approach enhances policy predictability and investor confidence, ensuring that inflation remains within a manageable range. However, Ghana’s economic structure presents significant challenges to this framework’s effectiveness.
Ghana’s Inflation: A Recurring Problem
Despite the adoption of inflation targeting, Ghana has faced frequent inflationary surges. While inflation reached single digits (8.6%) by 2011, external shocks and internal structural weaknesses have led to repeated target breaches.
- 2014-2015: Inflation rose above 17%, driven by global oil price fluctuations and cedi depreciation.
- 2022: Inflation peaked at 54.1%, the highest in two decades, following fiscal slippage and economic pressures.
- 2024: Inflation moderated to 23.2%, still above the Bank of Ghana’s target.
Key Drivers of Inflation in Ghana
Unlike advanced economies where inflation is often demand-driven, Ghana’s inflation is predominantly cost-push, influenced by factors beyond central bank control:
- Exchange Rate Volatility – The cedi’s frequent depreciation raises the cost of imports, fueling inflation.
- Import Dependency – Ghana relies heavily on imports, making domestic prices sensitive to global commodity price fluctuations.
- Fiscal Pressures – Persistent budget deficits and excessive public debt accumulation contribute to inflationary risks.
- Energy & Supply Chain Disruptions – Fuel price hikes, transport costs, and external supply shocks exert upward pressure on prices.
Given these structural realities, it becomes crucial to assess whether inflation targeting is the right tool to combat inflation in Ghana.
Inflation remains one of Ghana’s most persistent economic challenges, affecting businesses, households, and investor confidence. To address this, the Bank of Ghana formally adopted inflation targeting (IT) in 2007, aiming to maintain price stability through interest rate adjustments.
While the framework has improved monetary policy transparency, Ghana’s inflation history raises a critical question: Is inflation targeting an effective tool for reducing inflation in Ghana, or does it require structural reinforcements to be truly effective?
Evaluating the Effectiveness of Inflation Targeting in Ghana
While inflation targeting has introduced policy discipline and transparency, its effectiveness in Ghana has been mixed.
- Frequent Target Breaches – Inflation has consistently exceeded the Bank of Ghana’s target range, particularly during periods of economic instability.
- High Interest Rates & Economic Growth Trade-off – In response to inflation, the Bank of Ghana has implemented aggressive rate hikes (e.g., over 30% policy rate in 2023), making credit expensive and slowing economic growth.
- Limited Influence on Cost-Push Inflation – Given that Ghana’s inflation is largely supply-driven, interest rate adjustments alone cannot fully address inflationary pressures.
While inflation targeting has helped anchor expectations and improve monetary policy credibility, it has not been sufficient in addressing Ghana’s deep-rooted economic vulnerabilities.
The Path Forward: Rethinking Ghana’s Inflation Control Measures
For inflation targeting to be more effective, it must be complemented by broader economic policies that address structural inflationary drivers. Ghana needs to adopt a multi-faceted approach that includes:
- Stronger Fiscal Discipline – Reducing budget deficits and excessive government borrowing to minimize inflationary pressures.
- Exchange Rate Stability Measures – Enhancing foreign reserve buffers and diversifying exports to mitigate cedi depreciation risks.
- Industrialization & Import Substitution – Strengthening domestic production to reduce Ghana’s dependency on imports and external price shocks.
- Better Policy Coordination – Closer alignment between monetary and fiscal policies to create a more comprehensive inflation control strategy.
Without these structural reinforcements, inflation targeting alone will remain an insufficient tool for controlling inflation in Ghana.
Is It Time for Policy Rethink?
Inflation targeting has introduced greater policy transparency and credibility, but its effectiveness in Ghana has been severely limited by structural economic weaknesses and external vulnerabilities. While it provides a framework for managing inflation expectations, its ability to control inflation sustainably remains questionable.
If inflation targeting cannot fully address Ghana’s inflation problem, should policymakers continue relying on it as their primary tool—or is it time to explore alternative strategies for a more resilient economy?
