Raise policy rate to control inflation, stabilize currency- Economist

In the face of recent marked depreciation of the cedi, lowering the policy rate could exacerbate the already high inflationary pressures, further eroding the purchasing power of the currency and potentially leading to capital flight as investors seek more stable and higher-yielding environments, Dr Dennis Nsafoah, Assistant Professor of Economics at Niagara University has cautioned.

The Bank of Ghana (BoG) is set to soon announce the decision of its Monetary Policy Committee after its assessment of the Ghanaian economy in the past week.

According to Dr Nsafoah, a cut in the policy rate could deepen the economic challenges the country is currently facing.

“If I were part of the decision-making process, my vote would undoubtedly be in favour of increasing the policy rate,” he noted, adding that “a rate hike would signal a strong commitment to stabilizing the currency and controlling inflation. It would also help to restore confidence among both domestic and international investors, who may view such a move as a necessary step to safeguard the economy.”

The economist noted however that considering the current economic conditions and the possible implications of a rate hike on borrowing costs for businesses and households, “the MPC might opt for a more cautious approach.”

He pointed out that maintaining the current policy rate, while not as aggressive as an increase, could be viewed as a balanced strategy.

“It would provide some degree of support to economic activity while avoiding the potential negative repercussions of a rate reduction,” he argued.

The Bank of Ghana’s MPC, he observed “is at a critical juncture.” While a rate hike would address the immediate concerns of currency depreciation and inflation, maintaining the current rate might strike a delicate balance between supporting economic growth and ensuring macroeconomic stability. Reducing the policy rate, however, should not be considered an option under the present circumstances.