IMF backs BoG to keep policy rate tight over inflation scare

IMF backs BoG to keep policy rate tight over inflation scare

The International Monetary Fund (IMF) has urged the Monetary Policy Committee of the Bank of Ghana to keep the policy rate tight if inflation pressures persist.

The Monetary Policy Committee (MPC) is set to announce a new policy rate for the next few months on Monday after it took a rather surprising bold decision at its 100th meeting to cut the rate by 100-basis points to 13.5 percent, following more than a year-long tie of the rate at 14.5 percent.

But with inflation inching up in June and recording 7.8 percent, the directors of IMF, who have concluded Article IV discussions with government, have advised, in a report, that the MPC should keep the policy rate tight, thus, not to go for a further cut, should inflation pressure mount.

“Directors agreed that the monetary policy stance remains broadly appropriate while noting that tighter policy would be needed if inflationary pressures materialize,” he said.

At the last MPC meeting when the rate was cut, inflation had just dropped to 7.5 percent in May from the 8.5 percent it recorded the previous month. However, there was a risk of inflation shooting up following the passing of new taxes in May by parliament and fuel price increment in June. But Governor of the Bank of Ghana, Dr. Ernest Addison, maintained there is no cause for fear, as the committee projects those developments will not lead to a surge in inflation in the near-term.

“Headline inflation eased sharply to within the medium-term target band, driven mainly by lower food prices and base drift effects, a tight monetary policy stance and stable exchange rate conditions. Since the initial shock to inflation in April 2020, the forecast showed that inflation will be close to the central target by June 2021.

These forecasts remain broadly unchanged, and inflation would remain within the target band in the next quarter,” he said.

But just one month down the line and inflation has seen an upward climb in June, sparking fears that it may further sh00t up, given the factors that are presently driving it – food prices and increase in transport fares.

According to data from the Ghana Statistical Service (GSS), the main driver of the June inflation was the food basket which saw a 1.9 percentage point increment to record 7.3 percent in June, indicating the six-month continuous decline in food inflation has been reversed.

Among the food basket, items that recorded hike in the price levels above the average prices are milk and dairy products, tea, ready-made food, cereal products, oils and fats, fish and other seafoods, and live animals and meat. In all, food contribution to overall inflation was 41.8 percent.

Much of the rise in food prices can be attributed to higher inflation for transportation, as there was a 13 percentage points increase in transport fares in June. This resulted in transport’s contribution to inflation recording an increase of 18 percent from 16.5 percent a month earlier. This pushed the non-food group to record 8.2 percent inflation, albeit slower than the 9.2 percent in May.

In fact, Dr. Addison admitted at the last MPC meeting with the press that the factors driving inflation will require further monitoring: “Risks to the inflation outlook appear muted in the near-term, but pressures from mostly rents and transport fares, would require some monitoring to anchor inflation expectations.”

From his comments, and with those factors becoming a cause for concern in the past few weeks, it is likely that the committee will not take further risk by cutting the policy rate this time. Hence, it is expected that the rate will be maintained at 13.5 percent.