Economist from the University of Ghana Warns: Policy Rate Reduction May Drive Inflation Up
Dr. Adu Owusu-Sarkodie, a respected economist at the University of Ghana, has issued a stern warning to the Bank of Ghana (BoG) regarding the possibility of an early reduction in the monetary policy rate. He cautioned that such a move could jeopardize the significant strides the country has made in curbing inflation, potentially triggering a reversal in recent economic gains.
In an insightful discussion on JoyNews’ PM Express, Dr. Sarkodie drew attention to historical trends where premature easing of monetary policy was often followed by an unwelcome surge in inflation. This, he explained, undermines the central bank’s efforts to stabilize the economy and maintain price stability, which is vital for sustainable growth.
“Past experiences have shown us that when the monetary policy rate is reduced too soon, inflation tends to rebound sharply,” Dr. Sarkodie stated. “This is a critical juncture where the Bank of Ghana must exercise prudence and avoid decisions that could destabilize the fragile economic progress we have achieved.”
Ghana’s inflation rate, although on a downward trajectory in recent months, remains stubbornly above the medium-term target set by the central bank. This elevated inflation level continues to pose significant challenges for policymakers and affects the purchasing power of everyday Ghanaians.
Adding to the complexity are volatile global commodity prices and domestic cost pressures, especially in the prices of essential food items and fuel. These factors collectively increase the risk that inflation could escalate if the monetary policy is loosened prematurely.
The Monetary Policy Committee (MPC) of the Bank of Ghana is scheduled to announce its next decision on the policy rate imminently. The financial market remains divided on the best course of action. Some economists and market participants argue in favor of a rate cut to stimulate economic activity, particularly in sectors that have been sluggish. Conversely, others, including Dr. Sarkodie, are urging caution, warning about the potential inflationary fallout from such a move.
Dr. Sarkodie emphasized that while economic growth is undeniably important, it must not come at the expense of price stability. “Growth and stability must go hand in hand,” he said. “If inflation returns with a vengeance, the economic and social costs will be significant, especially for low-income households who are disproportionately affected by rising prices.”
The current policy rate stands at 28%, a level deliberately maintained to rein in inflationary pressures and anchor inflation expectations. Adjustments to this rate are highly consequential, sending clear signals to investors, businesses, and consumers regarding the central bank’s stance on balancing growth and inflation control.
In recent years, the Bank of Ghana has used the monetary policy rate as a vital instrument in its fight against inflation. Raising rates has helped temper demand and moderate price increases. However, lowering the rate too soon might stimulate demand excessively, thereby reigniting inflationary pressures.
Dr. Sarkodie called for a data-driven, measured approach in upcoming policy decisions. “It’s essential that the MPC carefully analyzes economic indicators and inflation trends before making any moves,” he noted. “A rushed decision to cut rates could undermine the country’s economic stability and jeopardize the recovery process.”
He also pointed out the broader implications of inflation beyond economics, highlighting how high prices erode living standards and increase poverty risks. “When inflation surges, everyday essentials become less affordable, and this hits the most vulnerable members of society hardest,” he explained.
Moreover, Dr. Sarkodie stressed that maintaining macroeconomic stability is crucial not only for consumers but also for attracting foreign investment, which is needed to support Ghana’s development ambitions.
In summary, while acknowledging the desire for accelerated economic growth, Dr. Adu Owusu-Sarkodie urges the Bank of Ghana to proceed with caution regarding the monetary policy rate. His recommendation is grounded in the need to sustain the gains made in reducing inflation and to protect Ghana’s economic future from the setbacks caused by premature monetary easing.
As the MPC deliberates, stakeholders and the public await the central bank’s announcement with keen interest. The hope remains that decisions will reflect a balanced strategy that prioritizes long-term economic health and shields Ghana’s economy from unnecessary volatility.
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