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Imported inflation cannot be managed by increasing policy rate - Financial expert

Yaw Appiah Lartey121 Yaw Lartey is a partner at Deloitte Ghana

Thu, 18 Aug 2022 Source: www.ghanaweb.com

A financial analyst and partner at Deloitte Ghana, Yaw Lartey, has stated that the current inflation rate cannot be dealt with by increasing the monetary policy rate.

The Bank of Ghana, on August 17, 2022, announced that the monetary policy rate has been increased by 300 basis points to 22% as part of efforts to deal with the rising inflation which currently stands at 31.7%.

According to Yaw Lartey in a report by Myjoyonline on Thursday, the current inflation has been largely influenced by imports, therefore, a hike in the policy rate will only increase the cost of borrowing but not essentially address the rising inflation.

“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 the 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,” he analyzed.

“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.

Instead of focusing on increasing the policy rate, Yaw Lartey wants the government to deal with the depreciating cedi.

“So, what government should focus on is to manage the rate of depreciation if it really wants to deal with imported inflation. We should ensure that the cedi is stabilized 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 is quoted by Myjoyonline.

According to the finance expert, the only benefit the country can get in terms of the cedi’s depreciation is the protection of investments, however, any return on investment lower than the inflation rate will be negative.

“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 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% in any of Ghana’s security is getting a negative return on investment,” he added.

SSD/IA

Source: www.ghanaweb.com
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