Would Bank of Ghana take IMF advice to further increase its policy rate?

The Monetary Policy Committee of the Bank of Ghana has been meeting in the past week. Today Monday January 25, 2016, the Committee will meet journalists to share the Bank’s views on the economy and to put out major decisions including the policy rate. The policy rate is the base rate at which commercial banks are supposed to use in lending to borrowers.

Currently, the rate is pegged at 26 per cent, the highest in 12 years and among the highest in the world.

It appears the Bank might increase the rate further, on the advice of the International Monetary Fund (IMF).

Ghana has subscribed to an IMF austerity programme. Under the Fund’s Extended Credit Facility Programme, Ghana is receiving a strings attached $918 million over three-years.

The Fund in its last review report on Ghana on January 13, 2016, suggested that the country must ‘further tighten monetary policy.’

With inflation currently at 17.7 per cent the Fund is suggesting, “To help bring inflation down towards its medium-term target, Bank of Ghana (BoG) should stand ready to further tighten monetary policy if inflationary pressures do not recede as expected. The preparation of an amended Bank of Ghana Act and BoG’s commitment to gradually deepen the foreign exchange market will help make the inflation targeting framework more effective.”

Tightening of the monetary policy would mean to constrict spending in the economy, and curb inflation by making it impossible to access credit. That can be achieved through a number of actions including raising short term interest rates.

The IMF said, “To help bring inflation down towards its medium-term target, Bank of Ghana (BoG) should stand ready to further tighten monetary policy if inflationary pressures do not recede as expected. The preparation of an amended Bank of Ghana Act and BoG’s commitment to gradually deepen the foreign exchange market will help make the inflation targeting framework more effective.

“Financial sector stability will need to be monitored closely in a context of deteriorating asset quality. The BoG should take immediate steps to increase resilience and address weaknesses in asset classification. Prompt implementation of the new banking laws currently under review by Parliament is also essential to safeguard financial sector stability.”

If the Bank of Ghana takes the IMF’s advice, the policy rate would be raised to 27 per cent.

By Emmanuel K. Dogbevi