Adnan Adams Mohammed
The Bank of Ghana last week increased the monetary policy rate by a further 3 percentage to 22 percent from 19 percent purposefully to control the frog-leaping consumer inflation.
Financial experts have expressed verified opinion in their response to a question on whether the policy rate could be an effective measure to tame the galloping inflation which currently is around 31.7%.
A Finance Lecturer and Associate Professor with Andrews University in Michigan, USA, in reacting to the increase in the Central Bank’s policy rate rate said, the monetary authority should have put a cap on the amount government borrows, so far as it has put a limit on the primary reserves of banks, although he welcomed the policy rate hike.
“So far as the Central Bank has put a limit or has increased the primary reserves for banks, it must also put a cap on the amount [borrowings] government withdraws from its account which is called debt monetization or printing of money”, Dr Williams Peprah suggested.
According to him, the printing of money is one of the major impacts on increasing inflation, “so, I was hoping that the Central Bank will address the issue”.
He however said “the Bank of Ghana’s monetary policy decision of increasing the rate to 22% is a good thing that we need now in the country. Because, we’ve noticed the disparities between the monetary policy rate, inflation rate, and treasury bill rate.”
“At the moment, the Treasury bill rate is hovering around 27% and the difference between that one and the monetary policy rate is worrisome. So moving it up to 22% is something that will be able to address the issue”.
On the Central Bank’s decision to boost the supply of foreign exchange into the economy and help stabilise the cedi, Dr. Peprah said the Central Bank should not limit it to only three industries (mining, oil and banking), but also to the other sectors of the economy.
“The Central Bank should not limit its discussions to only these three industries, but also to the service sector by focusing on telecommunications, because the firms hold some foreign exchange exposure.
Indeed, the cost of borrowing already will go up as I have mentioned because banks are now pegging their cost of funds to the Treasury bill rate and not the monetary policy rate”.
Contrary, a Partner at Deloitte Ghana, Yaw Lartey has expressed his worries about the increased policy rate, saying it will not address the rising inflation rate, but rather shoot up cost of borrowing.
According to him, though the monetary policy rate historically has helped to manage inflation, the current economic situation proves otherwise.
“So, we know that historically, the monetary policy rate has been used to manage inflation, particularly in an attempt to mop up excess liquidity from the market where necessary. However, in this particular situation, we do not believe that the increase in monetary policy rate will help manage inflation. And this is so because in the last four months, the Ghana Statistical Service has released inflation rate which points out to the fact that imported inflation is the key driver”.
“So imported inflation has outpaced domestic inflation. When you have imported inflation, it is very difficult to use monetary policy to manage it because a lot of it is driven by factors that are beyond the control of the market forces, particularly within the country”, he added.
Mr. Lartey advised the government to address the rate of depreciation of the cedi if the country wants to fight inflation.
“So, what government should focus on is to manage the rate of depreciation if it really want to deal with imported inflation. We should ensure that the cedi is stabilised or strengthened against major trading currencies because a lot of the imported inflation is driven by the fact that they’re importing some commodities; and when the local currency depreciates, we don’t have to spend more to import those commodities”.
He argued that addressing the cedi’s depreciation will help protect people’s investments, adding that the current rate of return on the money market is less than 28%, lower than the inflation rate of over 31%.
“And the benefits, we are likely to get is that people’s investments have been protected. So, as we speak we initially projected an inflation rate of 8% inflation. Now we have revised it to 28%. What that means is that any return on investment is less than 28% will be a negative return.”
“Currently, Treasury bills are trading at about 27%. This year’s inflation is about 31%. And anybody who’s investing at 26% whether any of Ghana’s security is getting a negative return on investment,” he added.
Mr. Lartey however urged the Bank of Ghana to make more funds available for financial institutions to help mitigate the cost of borrowing, and consequently reduce the cost of doing business.
Apparently, the Head of Economics Department at the University of Ghana, William Baah-Boateng has commended the Bank of Ghana (BoG) for its swift approach to increase the policy rate by 300 basis points to 22%, after an Emergency Monetary Policy Committee meeting.
Dr. Baah-Boateng in an interview indicated that had the BoG not intervened, the country’s inflation rate would have been 100%.
“In economics, there is something we call counterfactual so if the problem is coming and they don’t even step in at all, perhaps we would have been in the 100’s,” he said.
Currently, year-on-year inflation shot up to 31% in July 2022, latest data from the Ghana Statistical Service (GSS) has revealed.
However, the cost of borrowing is expected to go up significantly, and consequently, increase cost of living and doing business.
