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The Governor of the Bank of Ghana said that the Bank's policy framework for targeting inflation would ultimately help to reduce the cost of credit and stabilize the local currency firmly.
Mr Ernest Addison said the policy was delivering the expected results given the drop in the inflation rate recorded last year.
This follows concerns that the policy is not achieving the desired results because it does not serve the real sector of the economy.
Targeting inflation
The targeting of inflation is a monetary policy framework in which a central bank publicly announces an explicit mid-term inflation target for inflation and uses the inflation rate tool. interest in guiding inflation expectations.
This framework is based primarily on the fact that the best badet that monetary policy can offer to the economy is to support its long-term growth by using the tools available to maintain price stability.
To do this, a central bank must select a nominal "anchor" to use to influence economic conditions, particularly inflation.
It is believed that this policy has seen the measures taken by the Bank of Ghana to reduce and maintain inflation at very low levels, by controlling the amount of cedis in circulation and by ensuring that it corresponds to productivity.
The inflation targeting framework and the volatility of the exchange rate
The governor said that as long as the inflation rate remains high, a country's exchange rate will depreciate because of the inflation differential between it and its trading partners.
Mr. Addison said that to limit the rate of depreciation, this inflation gap between a country and its trading partners should be bridged.
According to him, the control of inflation was important and that is why the central bank would make every effort to bring it down to a low level.
The smaller the gap, the lower the expected depreciation rate and the more advantageous it would be for inflation, as the depreciation of inflation would be low.
Inflation and the cost of credit in Ghana
According to Dr. Ernest Addison, the current low levels of inflation can be attributed to the current framework, as well as prudent monetary and fiscal policy measures, all of which have helped to reduce single-digit inflation. .
He further added that "since the Bank of Ghana has adopted an inflation targeting framework, we have seen a significant improvement in our ability to reduce interest rates."
The governor said that the central bank could not accept the credit alone, given what had happened, because tax measures also contributed to this success.
Mr Addison also argued that it was important that inflation be kept at a low level, because of its impact on the poor, "we must emphasize the low inflation goal, because It is very important to remedy the importance of keeping inflation to a minimum as a political target. "
The central bank governor was also of the view that the banking sector was responding to recent reforms, an evolution that would make the banking sector more competitive and also help reduce the cost of credit.
He said signs already indicate that banks are adapting to this new expected environment. He was quick to add, however, that many factors affect the cost of credit. even if he was optimistic, the interest rate would drop and support companies.
According to the Bank of Ghana, data interest rates are currently hovering around 26 percent, down from a record 32 percent almost three years ago.
Will the inflation rate continue to decline?
Mr Ernest Addison argued that further structural efforts would be needed to support further disinflation and that when these policies begin to infect, a lower inflation rate would be achieved.
In his view, he added that "fiscal policy can not continue to contract endlessly, in the future" and that momentum may be needed to sustain growth.
We had reached this inflection point where, given the restrictive monetary policy, a balance between growth-friendly spending and structural reforms would be needed to bring inflation back to low levels.
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