The Governor of the Bank of Ghana, Dr. Ernest Addison, has said the central bank will not hesitate to increase its monetary policy rate to deal with any surge in inflation.
The central bank’s policy rate which signals the rate at which it lends to commercial banks is currently pegged at 16 percent while inflation for the month of September 2019 dropped to 7.6 percent.
While the latest inflation falls within the central bank’s medium-term target of 8-10 percent, Dr. Addison speaking at the Ghana Economic Forum organized by the Business and Financial Times newspaper hinted the bank will not be taking any chances on its inflation-targeting policy saying: “Monetary policy will remain vigilant to deal with inflation pressures should they emerge.”
Impact of raising policy rate
Increasing the policy rate has a direct effect on how much it costs for banks to borrow and this also translates to an increase interest rate charged by commercial banks on lending to the private sector.
Thus, increasing the interest rates makes lending prohibitive and basically controls the amount of money in circulation which invariably keeps inflation in check.
According to the Governor, the bank’s mechanism for keeping inflation in check has so far turn out successful.
“This framework has delivered low inflation and well-anchored inflation expectations around our medium-term target which serves as the bedrock for private sector investments, business growth, structural transformation and overall economic expansion.
It is incumbent on us, as policymakers to demonstrate a strong commitment to this policy framework in the near-term to ensure that the gains achieved so far are sustained. Achieving macroeconomic stability takes deliberate policies, sacrifices, and resources which if not sustained can easily unravel,” he added.
Dr. Addison’s remark comes after the International Monetary Fund (IMF) also urged the central bank to keep a watchful eye on inflation and factors that could lead to a rise in general prices of goods and services.
The Fund after its routine assessment of the Ghanaian economy this month commended the bank’s efforts at containing inflation but advised that proactive measures must be taken should inflation be seen moving beyond its current level.
“The monetary policy stance appears appropriate, but it should continue to remain vigilant to inflationary risks. Tightening may become necessary should inflationary or exchange rate pressures emerge,” the IMF said in its statement after the review of the economy.