The Bank of Ghana has maintained the policy rate at 14%, in spite of the negative outlook for inflation, driven by threats emanating from the Middle East tensions. Typically, when central banks maintain the Policy Rate despite threats of rising inflation, it is a monetary policy decision indicative of the central bank prioritizing economic growth over short term price stability.
In this case, the central bank, despite threats of inflationary pressure stemming from the Middle East crisis, anchors its decision on a relatively stable exchange rate, increasing reserve buffers and the continued fiscal discipline, which could collectively act to tame inflation.
Policy Rate or the Benchmark Interest Rate is set by a country’s central bank to serve as the foundation or basic rate that dictates all other interest rates throughout the financial system. If inflation rises, the central bank may increase interest rates to slow down price growth. It may reduce interest rates to boost economic activity when inflation decreases or when economic activities slow.
The Bank of Ghana’s risk outlook on inflation or its views on the possibility that future inflation will be higher than current rates, include the protracted Middle east crisis which could keep crude oil prices above $100 per barrel and raise the prospect of petroleum prices rising enough to affect domestic transport and utility costs.
The quarterly adjustment mechanism for utility tariffs could also exert upward pressure on non-food inflation in the coming months. However, relative exchange rate stability, increasing reserve buffers and continued fiscal discipline are expected to help moderate these upside risks hence the decision to maintain interest rate at 14%.
