IEA advocates for reforms in current inflation-targeting framework

Ghana’s current inflation rate of 12.6% above BoG target

Inflation-targeting framework was adopted in 2007

Ghana not achieving inflation targets, IEA

Director of Research at the Institute of Economic Affairs, Dr John Kwakye, is advocating for reforms in the current inflation-targeting (IT) framework undertaken by the Bank of Ghana.

Back in 2007, the central bank adopted the framework along with a flexible exchange rate regime in order to ensure price stability over the medium term.

But Dr John Kwakye believes that the existing structure does not help Ghana to achieve its inflation targets adding that it primarily places attention on demand-side factors which affect the major drivers of domestic inflation that is supply-sided.

Addressing journalists at a roundtable discussion on the theme; ‘Making Monetary Policy in Ghana More Fit-for-Purpose’, the IEA Director of Research opined that the current IT framework is responsible for the lack of achieving inflation targets, stable pricing and interest rates.

“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,” Dr. Kwakye is quoted by Citi Business News.

He continued, “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”.

To mitigate this, Dr Kwakye said, “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 were the main sources of inflation are coming from and try and target those.”

Meanwhile, Ghana’s current inflation rate according to the Ghana Statistical Service has reached 12.6 percent, a figure which is way above the Bank’s Ghana target.