IMF tells BoG to continue hikes in policy rate
The Bank of Ghana (BoG) along with its peers on the African Continent have been urged by the IMF to continue hiking their monetary policy rates.
According to the IMF, the continuous hike in the monetary policy rates by Central Banks on the Continent is necessary given the record high inflation rates recorded this year.
Ghana’s headline inflation has hit a 21-year record high of 37.2% as of September 2022 per data released by the Ghana Statistical Service (GSS).
In response, the BOG has increased its monetary policy rate by more than 11,000 basis points since November last year.
Currently, the BoG’s monetary policy rate stands at 24.5%.
For African countries with pegged exchange rates, the Fund asserts that, the amount of monetary policy tightening needed will vary, but both monetary and fiscal policy should be consistent with supporting reserves and maintaining the credibility of the peg.
It also said for countries with more flexible arrangements, a sudden surge in capital outflows presents authorities with a choice between tightening monetary policy, letting the exchange rate depreciate, or intervening directly to support the currency.
“Intervention to smooth exchange rate volatility is a helpful part of the policy toolkit, but it is constrained in many cases by low foreign exchange reserves. Most countries have external positions that are weaker than justified by fundamentals and so could benefit from depreciation. In these countries, a mix of tightening and nominal depreciation might be preferable,” the Fund said in its October 2022 Africa Regional Outlook Report.
So far, the Fund said monetary authorities throughout the region have indeed moved cautiously.
Over, two-thirds have started increasing policy rates to ensure that inflation and inflation expectations remain in check, but rate hikes have not kept pace with the pickup in headline inflation.
This caution, it stressed, is likely appropriate, given the supply-side origins of recent inflation and muted demand pressures.
But it urged authorities to still keep a close eye on possible second-round effects, as the costs of fighting inflation are typically much higher once inflation expectations become entrenched.
