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Monetary policy rate must go up to deal with rising inflation and depreciation of the Cedi

Monetary policy rate must go up to deal with rising inflation and depreciation of the Cedi

Bank of Ghana

The 105th Monetary Policy Committee (MPC) meetings of the Bank of Ghana, will now take place a week earlier than scheduled, starting from Wednesday, March 16, 2022, to Friday, March 18, 2022.

The Governor of the Bank of Ghana is therefore expected to address the press on Monday, March 21, 2022.

In the last MPC press release on January 31, 2022, the committee decided to keep the policy rate unchanged at 14.5%. Since then, headline inflation has increased to 15.7% in February from 13.9%, far outside the Bank of Ghana’s target range of 8% plus or minus 2%. In addition, the cedi has depreciated approximately 16.01% since the last MPC meeting. With the benefit of hindsight, it may be prudent to argue that leaving the policy rate unchanged at the time was not optimal.

With the MPC estimating inflation above its upper band and noting inflationary expectations to remain above target, it was evident at the time that the economy was ripe for a contraction of monetary policy. The MPC nonetheless decided to keep the monetary policy rate unchanged. They anchored their decision on the following reasons:

  1. The dynamics associated with the November 2021 policy rate hike were yet to be fully transmitted, and
  2. The expectation of a decisive implementation of the fiscal correction measures, especially the 20 percent cut in expenditure to help moderate the upside risks to the inflation outlook.

In November 2021, the MPC decided to increase the policy rate by 100 basis points from 13.5% to 14.5%. In the view of the committee, the effect of the November decision had not been fully transmitted and as a result they felt monetary policy stance was about right. Recent events about the economy have proven otherwise.

Reference to the second reason, it is evident that the MPC may have been overly confident in the commitments of the fiscal policy makers to implement fiscal correction measures. In as much as coordination between monetary policy and fiscal policy is good, the MPC ought to be measured in their expectations of fiscal authorities and focused on the tools at its disposal.

The objective of monetary policy in Ghana is to maintain stability in the general levels of prices. With current and forecasted inflation looking northwards and well beyond the Bank of Ghana’s upper band, we expect the MPC to employ contractionary monetary policy tools and increase the policy rate by at least 100 basis points to 15.5%. It must be noted that the current surge in oil prices inspired by the Russian-Ukrainian war and the depreciation of the cedi by about 16% have been pivotal to the rise in inflationary expectations.


Author: Dr. Dennis Nsafoah
Assistant Professor of Economics
Niagara University, NY
Member, Tesah Capital Research Committee

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