BoG’s inflation targeting framework can’t reduce rise in inflation – IEA

The Institute of Economic Affairs (IEA) is unhappy with the current approach being used by the Bank of Ghana in stemming Ghana’s inflation situation.

According to the Institute, the inflation targeting framework being used by the Central Bank cannot provide a lasting solution to the country’s inflation problem hence must be avoided.

In a paper titled, “How should the bank of Ghana respond to the run-away inflation and the high cost of living in Ghana,” the Director of Research at the Institute of Economic Affairs, Dr. John Kwakye argued that in principle, the inflation-targeting framework may be relevant in dealing with second-round inflationary effects of initial supply or cost shocks but the situation isn’t so in the Ghanaian context thereby rendering the framework less effective in stemming the country’s type of inflation.

In view of this, he stressed on the need for a comprehensive approach that includes direct targeting of the supply or cost elements to find a lasting solution to the rising inflation rate.

These assertions come a day before the three-day Monetary Policy Committee meetings which might end with a review of the Monetary Policy Rate due to the high inflation rate.

In April, Ghana recorded inflation of 23.6 percent, the highest in eighteen years and the eleventh consecutive monthly increase.

Not only is inflation substantially above the Bank of Ghana target of 8+/-2 %, but it has also markedly outstripped the current policy rate of 17%.

The IEA opines that going by the principle underlying the inflation targeting, with current inflation and future outlook being so elevated, the immediate response by the BoG should be to tighten monetary policy by increasing it by 200 basis points to help narrow the gap with inflation.

Click here to read the full paper.