Bank of Ghana errs on the side of caution

• Holds policy rate despite bright outlook

Despite indications of a more favourable final quarter and calls for a relax in its monetary control mechanism, Ghana’s central bank left its policy rate unchanged for a third successive time.

Following its recent sittings to review developments in the third quarter of the year, Dr Paul Acquah, the outgoing Governor of the Bank of Ghana (BoG), announced that the Ghanaian economy is seeing signs of stabilization in the third quarter, painting a bright picture on the outlook for the final quarter, but stopped short of announcing a reduction in its prime rate which has been pegged at 18.5 per cent since February this year.

The upward adjustment in the policy rate to a five-year high in February from 17 per cent was to anchor high inflationary expectations.

"Inflation and growth appear well balanced with policies working to strengthen the disinflation process that has begun and keep it on the path towards the inflation target of 14.5 percent for the year," Governor Paul Acquah announced last week at a meeting with the press.

Dr Paul Acquah, whose tenure has been largely successful with the implementation of a number of critical reforms in the country’s financial sector, said efforts to restraint inflation are beginning to make impact.

“Consumer price inflation as well as core inflation remain high around 20 per cent, but the recent monthly increases have been modest and there are signs of reduced volatility in prices and in the exchange rate of the cedi against the major currencies,” he said.

“Latest surveys show more positive assessment of the general macroeconomic outlook; and a rebound in both business and consumer confidence, with some downward revision of inflation expectations,” the Governor stated.

With food inflation expected to decline further, and the cedi having achieved some stability, appearing to be appreciating gradually against the dollar, several seasoned analysts had predicted a marginal drop in the policy rate this time round.

The MPC however, likely drawing on previous experiences, preferred to err on the side of caution.

Governor Acquah remarked in his delivery last week that even though there are initial signs on the global front pointing to recovery, particularly, in the US, Europe and the leading emerging market economies, “policy makers are receiving the news with some cautious optimism, warning against pre-mature withdrawal of stimulus measures which could put the recovery at risk”.

After peaking at 15.5% in October 2005, inflation followed a downward trend through early 2007. The central bank in response lowered its prime rate rather too rapidly from 18.5% in April 2005 to 12.5% in December 2006. Inflation however started shooting up again after April. 2007.

The central bank’s decision comes in the wake of stern criticism against the bank’s Inflation Targeting Mechanism which critics say has failed to address high rates of inflation in the country.

Joe Abbey, Executive Director of the Centre for Policy Analysis (CEPA) describes the government and the bank’s year-end inflation target of 14.5 per cent as overly ambitious given the current trend in consumer inflation, and points out that the desire to meet such short-term targets has dire implications for the domestic economy. The Policy institute projects a year end inflation of 20.9 per cent.

In an interview with the Financial Intelligence (FI), Dr Abbey took a swipe at the BoG’s Inflation Targeting framework, calling for a more flexible framework that could be more favourable to a developing economy.

According to the CEPA boss, CEPA sides with the IMF in calling for a more flexible Inflation Targeting framework, describing the current as too rigid a framework.

“There is nothing to clap about the fact that we perhaps are the only developing country that has an IT framework since it is not conducive to our economy”.

He said the global financial crises has revealed the fact that the IT framework as it is now can fail even in advanced countries that are already at low rates of inflation.

In the new model that is called for, the central bank should be able to project what the unemployment rate or GDP growth rate would be if we try to achieve a certain level of inflation, Dr Abbey noted.

“We need a model which will remind you of what it will cost you to achieve a particular target, and therefore you do not drive in the blind.

“You don’t just set such a target and try to chase it in the same year. You are more of a gradualist, because you have in mind the cost you are imposing on society. You have in mind that you are not just doing statistical modeling”, the renowned economist explained.

Quizzed by the FI on the effectiveness of the Inflation Targeting framework since its introduction into the country’s monetary policy process, Governor Acquah declined to comment, preferring an independent judgment on the effectiveness of the mechanism.

In-house analysts at the FI predict however that still under the guise of cautious optimism, new Governor, Kwesi Amissah-Arthur, might stick to the current 18.5% policy rate after the next MPC until a more favourable environment.