Dr Maxwell Afari explains the BoG’s choice of Inflation Targeting regime
First Deputy Governor of the Central Bank, Dr Maxwell Opoku-Afari, has explained the Bank of Ghana’s (BoG) choice of inflation targeting regime as the Bank’s preferred choice of a monetary policy framework or regime.
According to the First Deputy Governor, the failure of the two past monetary policy frameworks or regimes used – Exchange Rate Targeting regime and Monetary Targeting regime – led to the Bank’s choice of the recent monetary policy framework being used.
Speaking as a guest lecturer to students of the University of Ghana (UG), Dr Opoku-Afari noted that the use of the monetary targeting and exchange rate targeting regimes in the past, resulted in high and volatile inflation and exchange depreciation rates.
According to Dr Opoku-Afari, the high and volatile inflation and exchange rate depreciations hurt the country’s growth rates hence the need to switch to the current regime which has been widely applauded and accepted by most countries across the globe.
“The BoG’s choice of Inflation Targeting as a monetary policy regime, was due to the failure of the two previous regimes which were the Monetary and Inflation Targeting regimes.”
“These monetary policy frameworks resulted in high and volatile inflation rates and exchange rate depreciation. The high and volatile inflation rates were associated with lower GDP growth rates, inflation was hurting economic growth and so they had to be a change in the framework being used,” he stated.
Making a case for the current policy regime being used by the Bank, the First Deputy Governor posited that, the Inflation Targeting regime lowers the degree of the variability of inflation as well as enhances inflation rate predictability.
Adding that, the regime becomes an anchor for monetary policy tools.
“The current regime lowers the degree of inflation variability and enhances inflation predictability for planning and inflation targeting. It also becomes an anchor for monetary policy and by that I mean it holds down prices and expectations,” he added.
Speaking on how the Central Bank took the decision to set an inflation medium target band of 8+-10, Dr Opoku-Afari noted that, studies by the BoG indicated that per the country’s current economic development, the medium target band of 8+-10 was best suited for the country’s economic growth.
“It was difficult reaching at 8+-10 medium target band, studies by the BoG indicated that at the level of our economic growth, the target band was the best because with that the country can have a decent level of inflation which would not hurt economic growth,” he opined.
The BoG currently employs or practices monetary policy tools under the Inflation Targeting Monetary Policy Regime which forecasts and sets inflation targets for a fiscal year based on several macroeconomic variables and not just monetary aggregates.
A monetary policy regime provides the structure within which monetary policy decisions are made. In all, there are 3 monetary policy regimes namely; the Exchange Rate Targeting regime, Monetary Targeting regime, and Inflation Targeting regime.
