header('Content-type: text/html; charset=ISO-8859-1'); Using Policy Rate to Control Inflation and Liquidity… MPC faces toughest time - News Guide Africa
Banking Economy News

Using Policy Rate to Control Inflation and Liquidity… MPC faces toughest time

Adnan Adams Mohammed

As the Bank of Ghana Monetary Policy Committee (MPC) is scheduled to announce its next decision on May 23 amidst historical rise in inflation to record high of 23.6 percent in more than 18 years, MPC members have one of the toughest test to pass.

Some economists have predicted that, the MPC bimonthly review of the economy will ‘sweat’ to arrive at policy recommendations that balance its mandate to tame the unprecedented inflation spike, manage liquidity issues, and growing the economy. 

Underscoring the dilemma the central bank faces, an economist with Institute of Economic Affairs (IEA) have suggested upwards adjustment in the policy rate by about 200 basis point to help narrow the gap with rising inflation and also ease to some extent the risk of foreign currency outflows. But, Databank research proof otherwise as it predict that, a further tightening of the Monetary Policy Rate (MPR) could stifle economic growth.

“Any attempt by the central bank to tighten monetary policy further will be an attempt to squeeze water out of stone,” Courage Martey, an economist at Databank Group said in an interview last week. “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.”

Although, the Databank economist admits that the Committee members of the central bank will have “a nail-biting decision to make.” 

Annual inflation jumped to 23.6%, the highest since January 2004, from 19.4% in March. As calls increase for an intervention to stem the situation, the IEA has projected a 200 basis points increase in the monetary policy rate to 19 percent. The last MPC meeting in April increased the policy rate by 250 basis points to 17%, but, Director of Research at the IEA, Dr. John Kwakye, believes the rate should see another increase to par with the current inflation rate of 23.6 percent.

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 asserted that, “Taking all of these factors together, it may be surmised that the PR should be raised by another 200 basis points to 19 percent.”

“This will help narrow the gap with inflation and also ease to some extent the risk of foreign currency outflows. The adjustment will also provide some assurance to the markets that the BoG is committed to addressing the resurging inflation. Anything less than this may be interpreted as a weak response, which may be concerning to the markets.”

According to the Institute, the factors that should determine the rate adjustment include the wide gap between the current rate of 17% and inflation rate of 23.6%; the policy tightening by major central banks, which increases the risk of foreign currency outflows from developing and emerging market economies and which could put renewed pressure on the cedi; and the increase in the policy rate by as much as 250 basis points two months ago, an increase that may not have fully exerted its impact.

Apparently, according to the Databank’s Weekly Fixed Income Update, while it maintains an additional 200 basis hike in the policy rate in 2022, it expect the Monetary Policy Committee (MPC) to exercise restraint in May 2022, deferring a potential 100 basis points hike in MPR to July 2022.

It expatiates that, liquidity levels are already tight on the interbank market. Real returns on fixed-income securities are also depressed with the high inflation profile, continually undermining the Treasury’s financing operations.

“We note that short-term interest rates are misaligned, resulting in negative real yields, which could prompt the MPC to act in the week ahead”, it however pointed out.

The first and second-round effects of petroleum and transport price hikes, elevated food prices and the lagged impact of exchange rate pass through are the main drivers of the April 2022 inflation rate. 

“We believe these cost-push pressures will persist until the third quarter”, the investment bank stressed. Additionally, it noted that the implementation of the Electronic Transaction Levy from May 1st, 2022, and the impending hike in utility tariffs are further upside risks to inflation.

The MPC’s regular meetings over the next three days will conclude with an announcement of a decision to either maintain, reduce or increase the policy rate today, 23rd May 2022.

At the last meeting the policy rate which informs the rate at which the central bank lends to commercial banks which ultimately influences final interest rates was increased by 250 basis points to 17 percent to tame inflation which has so far risen by about 10 percentage points from January’s 13.9 percent to April’s 23.6 percent.

Related Posts

Leave a Reply

Your email address will not be published.

13 − two =