'Artificially high' policy rate has failed to tame inflation – IEA

The Institute of Economic Affairs (IEA) has said there is a detachment between the rate of inflation and the policy rate.

In its Economic Outlook for July and August 2024, the Institute said inflation fell by 33.2 percentage points from 54.1% to 20.9% between December 2022 and July 2024, however, the policy rate was reduced by the Monetary Policy Committee of the Bank of Ghana by just 1.0 percentage points within the same period.

The MPC cut the policy rate to 29 percent on 26 July 2024.

“The huge disparity between the declines in inflation and the PR suggests a disconnect between inflation and the policy rate,” IEA asserted.

It added: “The policy rate is artificially high and has, in and of itself, not been effective in controlling recent inflation, which, as we explained under Section 2.2, has been fuelled largely by supply and cost factors that are not easily amenable to the demand-based PR”.

Indeed, IEA noted, “The IMF recently described Ghana’s policy rate to be the highest in real terms in Sub-Saharan Africa (SSA).”

“This implies that Ghana’s monetary policy stance has been unusually tight. Ironically, Ghana’s inflation has also been among the highest within Sub-Saharan Africa, pointing to the ineffectiveness of our monetary policy,” the think tank posited.

“However, we know that the MPC is constrained under the ECF [Economic Credit Facility] to maintain a tight monetary policy stance. As such, the MPC is not likely to cut the PR by more than 100 basis points. As we suggested under Section 2.2, fighting Ghana’s current inflation requires targeting directly, the supply and cost drivers through a collaborative effort between the Bank of Ghana and the government,” it added.

The Bank of Ghana left its benchmark monetary policy rate steady for a third consecutive meeting at 29% on July 26th, 2024, citing concerns about inflationary pressures due to strains on the currency.