IEA calls for changes in current inflation targeting structure
The Institute of Economic Affairs (IEA) has asked for reform in the current inflation-targeting framework operated by the Bank of Ghana.
The Director of Research at the Institute of Economic Affairs, Dr. John Kwakye believes the framework does not help the country achieve its inflation targets because it predominantly focuses on demand-side factors, while the major drivers of domestic inflation are supply sided.
According to him, the current measure is largely responsible for the failure of inflation-targeting in achieving the country’s goal of low and stable prices and interest rates since its adoption by the Bank of Ghana 15 years ago.
He was speaking during a roundtable session on the theme ‘Making Monetary Policy in Ghana More Fit-for-Purpose’.
“Since we set the original inflation target of 8.5+/-2%, we’ve come down only slightly to set a target of 8+/-2%. Another requirement for inflation targeting is also that you should have reliable data to work with and your forecasting model should be quite comprehensive. Data adequacy and reliability cannot be said to be the best in Ghana, so we have limitations. So these were the initial conditions that faced us when we adopted inflation targeting. All the basic requirements were not in place, and the IMF even had reservations about our Inflation Targeting”.
Background
In 2007, the Bank of Ghana officially adopted an Inflation Targeting (IT) framework underpinned with a flexible exchange rate regime to ensure price stability over the medium-term.
At the institutional level, the government and the Central Bank jointly set the medium-term inflation target, and the Bank of Ghana is required to deploy its policy tools to attain the target.
When it was initially implemented in 2007, the target was set for 8.5% with a symmetric band of 2% but over the years, it has been reduced to the current rate of 8+/-2 percent.
That notwithstanding, Ghana has experienced an unstable trend of meeting and missing targets, with the rate exceeding the target most of the time.
For instance, the nation’s inflation rate currently stands at 12.6%; a figure way above the BoG’s target.
Dr. Kwakye further shared his opinions on how this problem can be solved.
“Instead of using this universal inflation targeting framework where we just adjust policy rates to control demand and expect that everything will fall in line, we should rather go into the CPI basket and interrogate where the main sources of inflation are coming from and try and target those.”
Source: Ghana Business
