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Amid the debate over efficacy of the\u00a0Bank of Ghana\u2019s (BoG) Inflation Targetting approach to reining-in the current rate of inflation, the Executive Head of Research, Media, Business Intelligence and Market Conduct at the Ghana Association of Banks (GAB), Dr. Ebenezer Ashley, is suggesting the adoption of Average Inflation Targetting as a more modern and comprehensive iteration of the approach \u2013 and one that keeps in step with global developments.<\/p>\n
Average Inflation Targetting (AIT) offers monetary authorities flexibility over time as it recommends above-target inflation caused by shocks \u2013 such as the pandemic and ongoing war \u2013 to be offset by lower inflation at a later fiscal period.<\/p>\n
For instance, using the Bank of Ghana\u2019s inflation target band of 6-10 percent as example, if inflation has averaged 8 percent over the past five years and a situation like a pandemic has shot it up above 10 percent in the present year, the central bank should not resort to a knee-jerk reaction of tightening the policy rate immediately as things will eventually come back to the normal average inflation rate.<\/p>\n
He made this call during discussions at a round-table session organised by the Institute of Economic Affairs (IEA) on the theme\u00a0\u2018Rethinking Inflation Management in Ghana in the Wake of COVID-19 and Russia-Ukraine War\u2019.<\/p>\n
\u201cThere is a paradigm shift from inflation targetting to average inflation targetting, and this is what the Monetary Policy Committee has to take into consideration as it will help put the economy on a sound recovery footing,\u201d Dr. Ashley said.<\/p>\n
The approach began gaining traction after the U.S. Federal Reserve revised its monetary policy strategy from the inflation target of two percent \u2013 which was set in 2012 \u2013 to \u201cinflation that averages two percent over time\u201d.<\/p>\n
Touching on the theme in a subsequent opinion piece published by the B&FT, Dr. Ashley stated that under the framework, whenever the BoG \u2013 through its Monetary Policy Committee (MPC) \u2013 reacts promptly and practically to above-inflation targets, the average inflation target and price level target will remain identical in the real economy.<\/p>\n
Elaborating on potential benefits to the wider economy, he explained that even in the event of policy rate hikes, the relative stability provided by the framework will translate into increased confidence from businesses and households.<\/p>\n
\u201cAverage Inflation Targetting has the potential to boost households and businesses\u2019 confidence in the economy; households and businesses will not cut back on spending. Thus, through the implementation of AIT, households and businesses will prevent the probable occurrence of another post-pandemic downturn or recession. The economy will avoid further financial stress; restore originally expected incomes; and restore the originally expected price level path in the medium-and-long-term,\u201d he explained.<\/p>\n
To hike or not to hike<\/strong><\/p>\n In a related development, with inflation accelerating to 29.8 percent in June, analysts are expecting an upward adjustment in the BoG\u2019s benchmark monetary policy rate by conclusion of the 107th meeting of its MPC \u2013 by as much as 200 bps.<\/p>\n Already, the monetary authority has raised the rate cumulatively by as much as 550 basis points (bps), with a 200 bps rise at its last meeting in May to 19 percent.<\/p>\n The IEA in a communique ahead of the impending meeting stated that on the balance of price stability and growth, it proposes that the MPR is raised by a further 100 to 150 bps; that is, to 20 or 20.5 percent. This, Dr. Kwakye indicated, is anchored on the prevailing negative real MPR \u2013 as inflation is higher than the rate, as well as hints by the International Monetary Fund (IMF) that tighter monetary actions are required.<\/p>\n \u201cTaking all the foregoing factors \u2013 both known and unknown \u2013 into consideration, we are minded to suggest that the MPC should increase the MPR by a further 100 to 150 basis points\u2026 This adjustment will narrow the inflation-MPR gap, although the real MPR will remain negative,\u201d Dr. Kwakye stated.<\/p>\n In addition, he believes the adjustment will signal the MPC\u2019s unwavering commitment to fighting inflation and bringing it under control. This, he said, will also send the right signal and help calm the markets.<\/p>\n \u201cThe next meeting of the MPC in September, when the Committee would have had the benefit of two more inflation readings in July and August, will give it a clearer sense of the trend for it to reposition the MPR accordingly,\u201d Dr. Kwakye said.<\/p>\n Source: B&FT<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n Featured Video\n<\/p>\n\n
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