Recent commentary from Dr. Frank Bannor of the Institute of Economic Research and Public Policy has raised pertinent questions regarding the Bank of Ghana’s decision to maintain the Monetary Policy Rate (MPR) at 28%.
Dr. Bannor’s insights, questioning the rationale in the face of encouraging macroeconomic indicators and real sector growth, are invaluable to the ongoing public discourse. It is precisely through such critical engagement that we can ensure transparency and foster a deeper understanding of the Bank of Ghana’s policy decisions.
Conspicuously, at the heart of the Bank of Ghana’s operations lies a singular, unyielding commitment: achieving and maintaining price stability. The bank’s medium-term inflation target of 8% with a symmetric band of \pm 2\% is not an arbitrary figure; it is the bedrock upon which sustainable economic growth, investment, and job creation are built. High and volatile inflation acts as a corrosive force, eroding purchasing power, distorting market signals, and ultimately hindering the very real sector growth we all desire.
While acknowledging the recent positive momentum in certain macroeconomic indicators and the encouraging performance of the real sector, it is crucial to understand that monetary policy is inherently forward-looking. These decisions are not merely a reaction to current headline figures but are based on a comprehensive assessment of the inflation outlook, weighing a multitude of domestic and external factors that could pose risks to price stability.
Observably, here’s why the Monetary Policy Committee (MPC) has deemed it necessary to hold the MPR at 28%:
1. Taming Persistent Inflationary Pressures: While Ghana has experienced a commendable disinflationary trend, with headline inflation showing a consistent easing, it remains significantly above BoG’s medium-term target. In-depth analysis indicates that underlying inflationary pressures, particularly from food prices and lingering global supply-chain disruptions, persist. Furthermore, BoG remains vigilant about the potential for second-round effects from past price increases to embed themselves in the economy. Maintaining the MPR at 28% sends an unequivocal signal of the Bank’s unwavering resolve to bring inflation back to target. A premature easing could easily ignite a resurgence of inflationary pressures, unwinding the hard-won gains in disinflation and potentially necessitating a more protracted period of high interest rates in the future.
2. Anchoring Inflation Expectations: A cornerstone of effective monetary policy is the ability to anchor inflation expectations. If businesses and consumers anticipate inflation remaining high, their actions—such as demanding higher wages or raising prices—can create a self-fulfilling prophecy. A firm and consistent policy stance, such as the current 28% MPR, reinforces the Bank’s credibility and helps to guide inflation expectations downwards. This is an indispensable element for achieving sustainable disinflation. A significant reduction at this juncture, despite some positive indicators, could be misinterpreted as a relaxation of their commitment, leading to an unanchoring of expectations and a loss of confidence.
3. Navigating Fiscal and External Headwinds: While ongoing fiscal consolidation efforts are showing promising signs, the economy still navigates significant fiscal pressures. The 2024 budget, while necessary, carries an expansionary stance, and the Bank continues to meticulously monitor the trajectory of these measures to ensure they align with their commitment to macroeconomic stability and satisfy the benchmarks of the IMF programme. Complementary fiscal discipline is critical, and monetary policy must remain vigilant. Furthermore, external risks, including volatility in global commodity prices, tight global financing conditions, and geopolitical uncertainties, continue to pose significant challenges. These external factors can directly impact domestic inflation and the exchange rate, thereby necessitating a cautious and prudent approach to monetary policy.
4. Supporting Exchange Rate Stability: Given Ghana’s import-dependent economy, the exchange rate plays a crucial role in our inflation dynamics. While we have observed a period of relative stability, maintaining a sufficiently tight monetary stance is instrumental in supporting the local currency and guarding against imported inflation.
5. Long-Term Growth Over Short-Term Comfort: I readily acknowledge the recent impressive real GDP growth figures, with the economy expanding significantly in the first three quarters of 2024, particularly in the non-oil, industry, and services sectors. This growth is indeed encouraging and testament to the resilience of the Ghanaian economy. However, the transmission mechanism of monetary policy operates with a time lag. While a high MPR may indeed increase the cost of borrowing in the short term, BoG’s overarching focus is on establishing a stable macroeconomic environment. This stability, over the medium term, will lead to lower and more predictable inflation, thereby reducing uncertainty and fostering sustainable investment and robust growth. The current discomfort, I believe, is a necessary trade-off for long-term economic well-being.
Dr. Bannor, you eloquently touched upon the concept of “voodoo economics.” But, a more insightful analysis reveals the Bank of Ghana’s decisions are meticulously crafted, grounded in sound economic principles, robust data-driven analysis, and an unwavering commitment to the bank’s core mandate of price stability. I believe that the bank is acutely aware of the challenges faced by businesses and households across Ghana, hence, every policy choice is made after a thorough assessment of the inherent trade-offs.
The downward trend in inflation, while significantly aided by their proactive policy stance, also reflects the cumulative impact of various macroeconomic adjustments. However, the path to sustained low inflation is rarely linear, and they must guard against any semblance of complacency. Their measured and cautious approach is precisely designed to ensure that the progress made is durable and that Ghana does not experience a costly reversal of its hard-won gains.
In closing, the Bank of Ghana’s decision to maintain the Monetary Policy Rate at 28% is a deliberate and prudent step. It underscores the bank’s unwavering commitment to bringing inflation down to target, anchoring inflation expectations, and safeguarding overall macroeconomic stability. These are the essential preconditions for sustainable real sector growth and ultimately, for improving the living standards of all Ghanaians. I hope they continue to meticulously monitor all economic indicators and stand ready to adjust our policy stance as conditions warrant, always with their paramount objective of achieving lasting price stability firmly in view.
By Raymond Ablorh,
Policy, Strategy & Communication
