Policy rate hike to have mixed impact on economy – Economist

The increase in Policy Rate by the Bank of Ghana will have a mixed impact on the Ghanaian economy, Economist, Dr. Adu Owusu Sarkodie has told Joy Business.

According to him, whilst rising inflation and recent exchange rate pressures will be tamed, the expected rate of economic growth will reduce.

The Monetary Policy Committee of the Bank of Ghana yesterday adjusted upward the Policy Rate by 1% to 14.5%, the first time since 2015.

Speaking to Joy Business, Dr. Sarkodie who is with the Economics Department at the University of Ghana said some actors in the economy will gain, whilst others will lose.

“The recent rise in inflation figure of 11% which is higher than the band of 10%, the increase in fiscal deficit of 9.5% higher than the threshold of 5%, the increase in energy prices, the uncertainties surrounding food prices and investment behavior has caused the Bank of Ghana to increase the policy rate by 1%, from 13.5 to 14.5%.”

Obviously, this policy will have its own consequences; there are positive effects and negative effects, as some actors in the economy will gain, while others will lose.

On the negatives, Dr. Sarkodie said “a higher policy rate will lead to an increase in interest rate by increasing the cost of borrowing which will reduce investments and then make the overall GDP negative. You will also expect consumers to reduce consumption, make a substitution from consumption to investment”.

He also expects the rate of economic growth to slow down.

With regard to the positives, he said “the effects of that is to reduce the depreciation of the cedi, increase exports and then increase investments. There is also the the overall effect of reducing inflation. So obviously, the overall impact of this policy rate is that the government expects a reduction in the depreciation of the cedi, which will fuel exports and reduce inflation rate. But it will have an adverse effect on the economic growth of this country.”

The Bank of Ghana during the emergence of the Covid-19 pandemic in March last year cut the policy rate by 100 basis points to stimulate spending and growth.

However, risks to inflation and exchange rate outlook as well as fiscal slippages compelled the Central Bank to adjust the policy rate upwards to 14.5% on Monday, 22nd November, 2021.

Source: Myjoyonline