BoG defends inflation targeting module
The Governor of the Bank of Ghana, Dr. Abdul-Nashiru Issaku has defended central bank’s inflation targeting aproach saying that the bank is on course to restore inflation to single digit by mid-2017.
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Many economists have maintained that the country’s inflation is supply-driven and not demand-driven and as such the inflation targeting strategy, which is a demand-side approach to managing inflation, is not effective.
Dr. Issaku told GRAPHIC BUSINESS in an interview that, “the Bank’s inflation targeting framework has delivered single digits in the past, and hence the framework is not the problem.”
He was optimistic that inflation would return to target band by the middle of next year, given the consistent progress being made in the implementation of the International Monetary Fund (IMF) programme.
He was also upbeat that the fiscal dominance issue would be addressed with the zero central bank net financing of the government, which is a provision under the IMF programme.
“The zero financing provision will effectively help to resist any recourse to the central bank for financing, except temporary accommodation in exceptional circumstances”, he said.
Fighting inflation
On the fight against rising inflation, Dr Issahaku said, while exchange rate stability had been achieved, inflation remained persistently high at 18.7 per cent in April 2016, marginally down from 19.2 per cent in March.
This, he said was being affected by the increases in utility tariffs, energy sector levies and transportation costs, but core inflation had started to decline from earlier months.
The Governor said the fiscal side had also been responsive, with the overall cash deficit improving from 10.6 per cent of GDP in 2014 to 6.7 per cent of GDP in 2015, and the primary balance close to zero.
On a commitment basis, the adjustment is even stronger, reflecting larger-than-programmed repayments of arrears.
The upward adjustments in petroleum and utility prices have however continued to drive inflation from its medium term target.
The IMF programme has also established clear benchmarks or performance criteria for government spending as well as others.
It is therefore expected that this year will be different from earlier election years that witnessed political business cycles.
The Bank of Ghana is currently reviewing the base rate model used in setting the interest rates of commercial banks.
The move has become necessary to reduce the lending rates financing for local businesses.
The revised framework is also aimed at achieving a more transparent and uniform process of setting the base rates of banks.
“We will also resume the monthly publication of the annual percentage rate (or APR) of banks, to provide more information to the borrowing public.”
“As we restore macroeconomic stability with fiscal consolidation, the government borrowing rates would continue to decline and this would help drive down the high lending rates among banks currently. This should help boost investment and growth”, Dr Issahaku added.
"My focus is to work assiduously to achieve our core responsibility of ensuring price stability," Issahaku said.
This is to buttress the governor’s earlier statement that his top priority was to fight inflation, but he also wanted to pursue new policies to boost local business growth.
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“We are also working to facilitate real sector lending to boost growth. We are working with the banks to provide incentives and encourage lending to productive sectors of the economy, and most importantly for banks to lend at reasonable rates, especially to SMEs”, he said.
New reforms
On expected reforms, the governor said BoG has been involved in a number of policy and institutional reforms but plans to continue with the efforts to promote efficiency and to facilitate the delivery on the mandate of the bank.
“Specifically, we intend to continue with measures for example to enhance monetary policy effectiveness and will scale up our policy communication function in line with best practices in inflation targeting countries”, he said.
“We will also intensify efforts to strengthen the regulation of the microfinance sector, and promote financial sector development generally”, he added.
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“We are currently working to enhance the effectiveness of the transmission mechanism of monetary policy through a number of money market reforms as well as forex market reforms”.
Pull quote
As we restore macroeconomic stability with fiscal consolidation, government borrowing rates would continue to decline and this would help drive down the high lending rates among banks currently
Key note
Inflation has continued to be persistent over the period since 2012 because of fiscal dominance and the role of administered prices.
dominance issue would be addressed with the zero central bank net financing of the government, which is a provision under the IMF programme.
Advertisement
“The zero financing provision will effectively help to resist any recourse to the central bank for financing, except temporary accommodation in exceptional circumstances”, he said.
Fighting inflation
On the fight against rising inflation, Dr Issahaku said, while exchange rate stability had been achieved, inflation remained persistently high at 18.7 per cent in April 2016, marginally down from 19.2 per cent in March.
This, he said was being affected by the increases in utility tariffs, energy sector levies and transportation costs, but core inflation had started to decline from earlier months.
The Governor said the fiscal side had also been responsive, with the overall cash deficit improving from 10.6 per cent of GDP in 2014 to 6.7 per cent of GDP in 2015, and the primary balance close to zero.
On a commitment basis, the adjustment is even stronger, reflecting larger-than-programmed repayments of arrears.
The upward adjustments in petroleum and utility prices have however continued to drive inflation from its medium term target.
The IMF programme has also established clear benchmarks or performance criteria for government spending as well as others.
It is therefore expected that this year will be different from earlier election years that witnessed political business cycles.
The Bank of Ghana is currently reviewing the base rate model used in setting the interest rates of commercial banks.
The move has become necessary to reduce the lending rates financing for local businesses.
The revised framework is also aimed at achieving a more transparent and uniform process of setting the base rates of banks.
“We will also resume the monthly publication of the annual percentage rate (or APR) of banks, to provide more information to the borrowing public.”
“As we restore macroeconomic stability with fiscal consolidation, the government borrowing rates would continue to decline and this would help drive down the high lending rates among banks currently. This should help boost investment and growth”, Dr Issahaku added.
"My focus is to work assiduously to achieve our core responsibility of ensuring price stability," Issahaku said.
This is to buttress the governor’s earlier statement that his top priority was to fight inflation, but he also wanted to pursue new policies to boost local business growth.
“We are also working to facilitate real sector lending to boost growth. We are working with the banks to provide incentives and encourage lending to productive sectors of the economy, and most importantly for banks to lend at reasonable rates, especially to SMEs”, he said.
New reforms
On expected reforms, the governor said BoG has been involved in a number of policy and institutional reforms but plans to continue with the efforts to promote efficiency and to facilitate the delivery on the mandate of the bank.
“Specifically, we intend to continue with measures for example to enhance monetary policy effectiveness and will scale up our policy communication function in line with best practices in inflation targeting countries”, he said.
“We will also intensify efforts to strengthen the regulation of the microfinance sector, and promote financial sector development generally”, he added.
“We are currently working to enhance the effectiveness of the transmission mechanism of monetary policy through a number of money market reforms as well as forex market reforms”.