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BoG is misdiagnosing the inflation problem – Prof Gatsi

Adnan Adams Mohammed

An economist at the University of Cape Coast has taken a swipe at the Bank of Ghana’s decision to increase the policy rate by 200 basis points to 19 percent.

The economist opined that, the Central Bank maybe misdiagnosing the problem. He said, the increase in the BoG policy rate is in response to risk to the economy; high inflation, weak financial inter-mediation   and fiscal stress, which is expected to trigger lending rate hike.

The Monetary Policy Committee of the Bank of Ghana, last week, announced a hike in the policy rate by 200 basis points to 19% from the 17% announced in April. The MPC justified that, the bank’s latest forecast shows a continued elevated inflation profile in the near term, with a prolonged horizon for inflation to return to the target band. Inflation expectations by consumers, businesses and the banking sector have also heightened. The risks to the inflation outlook are on the upside, and emanate from availability of inputs for food production, imported inflation, continued upward adjustments in ex-pump petroleum prices and transportation costs, possible increases in utility tariffs, and potential wage pressures. The second-round effects of these administered price adjustments would further amplify inflation pressures in the outlook. “On the basis of the above assessment, the Committee decided to raise the policy rate by 200 basis points to 19.0 per cent”, the Bank explained. But, some economists think otherwise.

“The measures taken in an environment of volatile depreciation promises rather further inflation”, Professor John Gatsi, Dean of School of Business and Finance at UCC said in reaction to the MPC’s announcement, last week. “High inflation and upward lending rate will undermine government contracts execution and create new levels of arears due to cost implications for procurement of materials.”

Prof Gatsi expatiated that, a number of projects maybe abandoned due to inflation, depreciation and cost of borrowing and warned that there maybe too much pressure on the banks as cost of mobilizing funds continue to increase with the possibility of distorted returns on placement of funds with the banks.

At a press briefing, last week, the central bank said: “In sum, the Committee observed that the global growth recovery is showing signs of a slowdown, on account of heightened risks emanating from lingering supply chain bottlenecks, China’s zero-Covid policy, and the Russia-Ukraine war. Concurrent with the growth slowdown is the sharp rise in inflation across several advanced and emerging market economies, which has posed some challenges to central banks globally. Global price pressures have broadened beyond the volatile items of energy and food. This has prompted some coordinated monetary policy tightening in Advanced Economies and most Emerging Market and Developing Economies and triggered tightened global financing conditions. The spillover effects of these policy responses have impacted economies through the trade and finance channels, with vulnerable developing countries faced with capital flow reversals and currency pressures. Ghana’s economy is already facing some of these headwinds from these spillover effects”.

It said growth prospects in the domestic economy remain positive and the Bank’s high-frequency indicators point to continued and increased momentum in economic activities with private sector credit showing some improvement in real terms, despite the increased price pressures.

“All these are resulting in a closure of the negative output gap. The banking sector remains robust, with sustained growth in total assets, investments and deposits. However, business and consumer confidence have dipped, reflecting the sharp depreciation of the currency and the general high inflationary environment, which has resulted in higher input costs for businesses. A quick turnaround, with more confidence-building measures to counter these conditions, would provide further boost to the real economy”, it added.

On fiscal policy implementation, the Committee observed that execution of the budget for the first quarter was broadly in line with targets although there was a minor deviation in the deficit target, stemming largely from low revenue receipts.

It is the expectation of the Committee that fiscal consolidation will take hold gradually and the mid-year budget review will provide further fiscal fine-tuning to ensure that the fiscal consolidation efforts stay on track.

The MPC said despite the improvement in the trade balance due to favourable commodity prices, the external sector has weakened somewhat due to developments in the capital and financial account.

Also, it said the domestic economy does not fully benefit from higher oil and gold prices due to retention agreements in these sectors. The increased repatriation from dividend payments and profits, as well as the net portfolio reversals, have resulted in a widened balance of payments outturn and loss of reserves. The prevailing tight global financing conditions, and further policy rate hikes in Advanced Economies continue to pose risks to the external outlook.

“Headline inflation surged in April 2022. And, both headline and core inflation have stretched further above the upper limit of medium-term target band. The heightened uncertainty surrounding the inflation dynamics has weighed heavily on the domestic environment and significantly depressed business and consumer sentiments”, adding: “The inflation numbers show that while food inflation has accounted for the increases in inflation over the past year, the recent jump in April shows that relative price increases in the non-food sector is accelerating at a fast pace, which provides information on the extent to which prices are becoming embedded”.

“These considerations show that with the strong rebound in growth and the closing of the negative output gap, the balance of risk is clearly on inflation. The MPC took the view that it needed to decisively address the current inflationary pressures to re-anchor expectations and help foster macroeconomic stability”.

“On the basis of the above assessment, the Committee decided to raise the policy rate by 200 basis points to 19.0 per cent”.

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