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IEA predicts upward revision of policy rate - but Economist disagrees

By: Emmanuel Bruce
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Dr Eric Osei-Assibey, Adjunct Senior Fellow, IEA, explaining a piont
Dr Eric Osei-Assibey, Adjunct Senior Fellow, IEA, explaining a piont

An Adjunct Senior Fellow of the Institute of Economic Affairs (IEA), Dr Eric Osei-Assibey, has predicted a possible increase in the monetary policy rate of the Bank of Ghana at the next announcement by the bank’s monetary policy committee.

He said looking at the market conditions now, there was a tendency that inflation prices would increase this month, which would leave the central bank with no option than to increase the policy rate.

Dr Osei-Assibey said this in an interview with the Graphic Business on the sidelines of a roundtable discussion which was organised by the IEA on inflation targeting.

“Looking at the market conditions now, looking at the fact that fuel prices are going up and utility companies are agitating for higher utility prices, there is that tendency that inflation pressures will increase this month,” he stated.

“And if that happens, per the inflation targeting framework that we are implementing, the central bank would have no other option than to adjust the monetary policy rate upward,” he added.

He said because the country did not have control over factors such as commodity prices and exchange rates, any time crude oil prices went up, it affected the economy so much, unlike in the developed countries.

“The transmission into the economy is very weak in the developed countries, but ours is about 40 per cent, so any external shock affects us so much,” he mentioned.

With inflation consistently trending downwards to the current 10.3 per cent that was recorded in January, 2018, the BoG has also responded by consistently reducing the policy rate from 25.5 per cent as at January, 2017 to the current 20 per cent.

Economist disagrees
An economic analyst with Data Bank Financial Services, Mr Courage Kwesi Boti, however disagrees with Dr Assibey’s prediction.

He said although the inflation concerns raised were valid, on the broader scale the threat to inflation was quite balanced.

Speaking in an interview with the GRAPHIC BUSINESS, he said “the condition he is giving is very valid but I don’t agree with the conclusion.”

“Yes, we are targeting inflation so the BoG will be considering the threat to inflation when deciding whether to ease down or increase the monetary policy rate but there are so many factors that affect inflation,” he stated.

“Utility companies are agitating for increase in utility tariffs and some of them are asking for as high as 200 per cent hike but on the other hand government is also counter proposing a 14 per cent reduction for non-residential users and 13 per cent for residential users. The utility companies have met with the stakeholders for each of them to advance their argument and nothing has been concluded yet whether there is going to be a reduction in tariffs  or hike and if there is a hike, how much so it wil be pre mature to predict that inflation will increase,” he added

He however agreed that If there happens to be a hike, then that would be a distortion to prices which would cause inflation to rise.

Petroleum prices
Touching on the petroleum prices, Mr Boti said although petroleum prices had been up in a few weeks time as it hit the US$70 per barrel mark, he explained that it was due to certain shocks on the international market which were temporary

“As we can see with the correction coming into the market, the market price has now declined to US$62 per barrel and in the long term I expect it to be around US$60 per barrel,” he indicated.

Should the price drop, he said the only inflation threat that would be the depreciation of the cedi.

“The cedi has been stable so far and there is not so much risk there as well,” he noted.

Marginal rise in inflation
Mr Botit, however, pointed out that there might be a marginal rise in inflation this month due to the effect of the petroleum price that happened in this window but expects it to be temporary.

“Beyond February, we should see inflation resume a downward trend so for me the real threat to the inflation outlook is balanced and we should be hitting the medium term target by half year and if that expectation holds, I expect the BoG to rather start easing the policy rate again,” he said.

Background
The functional autonomy of the Bank of Ghana (BoG) in adopting inflation targeting is guaranteed under the Bank of Ghana Act, 2002 (Act 612).

But it was not until 2007 that the bank officially adopted an inflation targeting framework for the conduct of monetary policy.

Prior to its adoption, the BoG operated largely a direct controlled system of monetary framework, known as the monetary aggregate regime, with money growth as the nominal anchor in arresting inflation.