Fuzzy policy message in Ghana

The Bank of Ghana issued quite a fuzzy policy message after its MPC meeting, saying it was keeping interest rates on hold while citing upside risks to inflation and downside risks to growth.

The MPC statement reads as follows:

In the near term, the tight policy stance and stability on the foreign exchange market alongside easing inflation expectations, and generally improving fundamentals should provide additional momentum to the disinflation process over the forecast horizon. The MPC therefore views the current monetary policy stance as appropriate since inflation levels remain above the medium term target band of 8±2 percent.

There are however risks in the inflation outlook. These include unanticipated upward adjustments in utilities and petroleum product prices and possible second round effects from such adjustments on prices. The slow but persistent pickup in food inflation, since August 2014, is also a source of concern for inflation.

The growth outlook is broadly positive contingent on sustained improvements in the energy supply, continued stability in the local currency and additional oil and gas production. However, risks such as tight credit conditions and continued tightness in the fiscal stance may moderate the pace of economic activity.

In conclusion, the statement said:

In assessing the current economic conditions, the Committee views the risks to inflation and growth as balanced and therefore decided to maintain the monetary policy rate at 26 percent.

Unlike for instance the Bank of England and other leading inflation targeting central banks, which provide the outlook for future evolution of interest rates in a transparent fashion, the BOG gives no hint on the rate outlook.

Rampant inflation is a big story in Ghana. From the perspective of tackling this No. 1 policy issue, BOG's statement left at least three important questions unanswered:

  • First, provided that the risks to inflation and growth were seen as balanced, the reader learns nothing about what kind of downside risks to inflation and upside risks to growth, if any, did the MPC identify?

  • Second, did the MPC truly believe the current policy rate level is enough to combat the upside inflation risks and bring about disinflation as desired? The words used in this sentence are just too vague:

    In the outlook, the tight policy stance is needed to deepen the gains made on the foreign exchange market and strengthen the disinflation process over the forecast horizon.

  • How is the MPC going to balance the potential need for additional policy tightening to tame the upside inflation risks with the perceived downside risks to growth going forward? Is the MPC ready to tighten policy further at the expense of growth to fulfill its price stability mandate?

All in all, in my March ranking of central bank policy statements, this BOG's most recent release would end up, at best, at the top of the laggards section.