A bite at BoG’s inflation targeting framework.. is it still effective or a ‘try your luck’?
Adnan Adams Mohammed
As inflation rate in the country has leapfrogged within past few months to record highest rate in about 18 years has unveiled the Bank of Ghana’s inflation control framework to criticism.
The current inflationary trend, despite the Monetary Policy Committee of the central bank raising the policy rate by about 250 basis points last month, yet, it was that month annual inflation rate jumped from 19.4% in March to 23.6%, the highest since January 2004. Not only is the inflation substantially above the Bank’s target of 8+/-2 %, but it has also markedly outstripped the current policy rate of 17%.
While inflation is high it is also straining economic growth together with slowing global output and a 2.5 percentage point increase in March in the key interest rate, the biggest hike since at least 2002. The S&P Global Ghana Purchasing Managers’ Index has also been below 50 since February, indicating a deterioration in business conditions.
All things being equal an increase in the policy rate is supposed to tame the rate of inflation, but in the current development has disapproved the macroeconomic management theory. This has therefore lay bare the inflation targeting regime of the central bank, which it uses to control economy in terms of currency exchange rate and rate of economic growth, to criticisms by some economists as to whether it real works the magic or it is a ‘try your luck’ theory.
Among such economists, is the Director of Research at the Institute of Economic Affairs (IEA), Dr. John Kwakye, who has expressed unhappiness with the current approach being used by the Bank of Ghana in stemming Ghana’s inflation situation.
According to the Institute, “the inflation targeting framework being used by the Central Bank cannot provide a lasting solution to the country’s inflation problem hence must be avoided.”
In a paper titled, “How should the bank of Ghana respond to the run-away inflation and the high cost of living in Ghana”, Dr. Kwakye argued that, “in principle, the inflation-targeting framework may be relevant in dealing with second-round inflationary effects of initial supply or cost shocks but the situation isn’t so in the Ghanaian context thereby rendering the framework less effective in stemming the country’s type of inflation.”
In view of this, he stressed on the need for a comprehensive approach that includes direct targeting of the supply or cost elements to find a lasting solution to the rising inflation rate.
The IEA opines that going by the principle underlying the inflation targeting, with current inflation and future outlook being so elevated, the immediate response by the BoG should be to tighten monetary policy by increasing it by 200 basis points to help narrow the gap with inflation.
Arguably, an economist with Databank Group has indicated that, the BoG’s MPC will have tough time to arrive at their decisions in their May bimonthly review meeting.
“The monetary policy committee of the central bank will have a nail-biting decision to make,” Courage Martey said in an interview. “Any attempt by the central bank to tighten monetary policy further will be an attempt to squeeze water out of stone.”
Mr Martey cautioned that, “Inflation hasn’t peaked yet, so the MPC would want to avoid creating a perception of chasing inflation when it should be ahead of the inflation curve.”
However, according to an astatute financial and economic journalist who doubles as the managing editor of Economy Times newspaper, Elorm Desewu, year on year inflation is expected to worsen further in the coming months in the wake of the decision by the Public Utility Regulation Commission (PURC) to hike tariffs of electricity and water as well as increase in transport fares by the transport operators in the country.
Fortnight ago, the Electricity Company of Ghana and the Ghana Water Company tabled a tariff hike before the PURC awaiting approval or disapproval for consumers to pay more in access of 148 percent for power and 334 percent for water, while the transport fares have gone up by 20 percent effective last week.
“This is expected to impact heavily on the non-food inflation which would trigger a further rise in year on year inflation”, the journalist noted in his analysis.
“The current development would pose a headache to the seven member committee of the Monetary Policy Committee (MPC) as they announce their decisions of the bimonthly review of the economy today, May 23, 2022.
Already, the MPC has revised it medium term inflation target of 8+/-2 to March 2023.
Additionally, the Bank of Ghana announced some measures in April this year in relation to universal banks, in attempt to anchor inflation. These include, the Cash Reserve Ratio was increased to 12 percent; the Capital Conservation Buffer was reset to the pre-pandemic level of 3 percent, making the Capital Adequacy Ratio a total of 13 percent; and the provisioning rate for loans in the Other Loans Exceptionally Mentioned (OLEM) category was reset to the pre-pandemic level of 10 percent.
But recent figures from the Ghana Statistical Service, (GSS) depict that year on year inflation measured by the Consumer Price Index, (CPI) increased significantly to 23.6 percent for the 12-months period ended April, 2022 from 19.4 percent in March, 2022.
According to the Ghana Statistical Service, “four divisions – transport (33.5%); household equipment and routine maintenance (28.5%); food and non-alcoholic beverages (25.6%), and housing, water, electricity, gas and other fuels (25.0%) recorded inflation rates above the national average of 23.6% with transport recording the highest inflation.”
National month-on-month inflation from March 2022 to April 2022 was 5.1%.
It also noted that this is the first time in 29 months that inflation for imported items exceeded domestic inflation. Whilst inflation for locally produced items was 23.0%, inflation for imported items was 24.7%.
“The inflation for imported goods is higher than the 17.3% recorded for March 2022 while the inflation for locally produced items is 23.0% higher than the 20.0% recorded in March 2022.”
Whilst Food and Non-Alcoholic Beverages inflation was 26.6%, Non-Food inflation stood at 21.3%.
April 2022’s food inflation of 26.6% is higher than both food inflation for March 2022 (22.4%) and the average of the previous 12 months (13.5%).
Food inflation’s contribution to total inflation however, decreased from 51.4% in March 2022 to 50.0% in April 2022.
All the 15 food subclasses recorded positive month-on-month inflation with Fruit and Vegetable Juices recording the highest of 15.3%.
Non-food year-on-year inflation on average went up again in April 2022 compared to March 2022, that is from 17.0% to 21.3%. Only one out of the 12 Non-food Divisions had the 12 months rolling average to be higher than the year-on-year inflation for April 2022 for the divisions. Transport is the Division that recorded the highest inflation in April 2022 (33.5%).
There is a high expectation that the MPC would again hike the policy rate further to stem the rising inflation.