Too early to scrap inflation targetting regime – Prof. Quartey

The Head of the Economics Department of the University of Ghana, Prof. Peter Quartey, has said the central bank’s inflation-targetting mechanism remains effective, suggesting that calls for abolition of the regime are premature.

Prof. Quartey was speaking at a public lecture organised by the Department of Economics, University of Ghana on the effectiveness of monetary policy in the country, and said: “I think it is too early to scrap it; it is working for us. Rather, let us look at ways to fine-tune it”.

Inflation-targeting is generally a monetary policy regime in which a central bank has an explicit inflation rate target for the medium-term (8±2 percent in the case of BoG), and announces this inflation target to the public.

The assumption here is that the monetary policy will support long-term growth of the economy by helping to maintain price stability.

The lecture comes on the back of calls for the central bank to take a second look at its inflation-targetting regime, which has been in place for about ten years. One of the proponents of such calls is economist Dr. Eric Osei-Assibey of the Institute for Economic Affairs (IEA).

Dr. Osei-Assibey, speaking at a recent IEA lecture said: “We need to make sure the productive sectors of this economy are good. We are exporting more, we have favourable terms of trade and our currency is strong just like in developed countries, so that inflation target will be relevant to us.

“If inflation-targetting is to continue, then there is a need to strengthen the economic fundamentals, otherwise an alternative policy that is in sync with our development agenda should be sought.”

But Prof. Quartey, speaking to the B&FT on the sidelines of the lecture, said it is misleading to think that inflation-targetting just focuses on inflation.

“There are a lot of variables that go into inflation-targetting. It involves factors such as exchange rate, interest rates, the real sector etc. All of these factors come into play before the monetary policy decides whether to reduce, maintain or raise the policy rate.

“I don’t think we should be too fixated on the point that we are just targetting inflation and therefore it is not adequate in addressing the economic challenges of this country. Imports, for instance. depend on exchange rates; if the exchange rate is volatile, it will have an impact on the imports. So, if the bank is able to ensure exchange rate stability, it is therefore indirectly able to control imports or the external sector,” he said.

“If the bank is able to affect interest rates, it means people are able to borrow at reduced cost – which is going to affect investment, growth as well as employment. These are some of the factors that the central bank uses to control the real sector of the economy, and I don’t think we should have the impression that it’s only inflation it is targetting,” Prof. Quartey added.

Dr. Osei-Assibey, who also attended the lecture, in his submission reiterated that despite the bank’s insistence on the inflation-targetting framework, the system is largely not popular in Africa.

He said out of the 195 countries in the world, only 33 are practicing inflation-targetting; of which Ghana, South Africa and Uganda are the only sub-Saharan African countries.

“While changing the inflation-targetting involves risks and can run into important transitional difficulties, we must give sufficient consideration to the fact we need to rethink how to best pursue monetary policy (price stability) that will be growth-enhancing and have employment creation potential.

“The most important aspect that I believe we should introduce is a framework that includes thinking about price stability, exchange rate stability and growth,” Dr. Osei-Assibey argued.