Liquidity reducing while inflation holding up – Bank of Ghana

Bank of Ghana3Data from the Bank of Ghana shows that the central bank in its quest to bring down inflation, has managed to reduce liquidity significantly whereas inflation has only just begun to show signs of easing.

Backed by the advice of the International Monetary Fund (IMF), the Bank of Ghana has since 2012, raised its policy rate from 13.5 per cent to a twelve-year high of 26 per cent to control currency in circulation and inflation.

The central bank has however faced the criticism of some analysts who have argued that the policy rate hikes rather worsen the cost of credit and consequently, the supply of goods and services since the current run of inflation is cost-push and not as a result of excess liquidity.

According to data from the bank, the annual growth rate of currency outside the banks dropped to 15.2 per cent at the end of the first quarter of 2016, from 25.4 per cent at the start of the year, and 27.7 per cent at October 2015.

The growth rate of total liquidity comprising currency outside banks, demand deposits and broad money (time deposits), also dropped to 18.1 per cent at the close of the first quarter, having inched up to 29.6 per cent at the start of the year.

The liquidity growth rate had not dropped lower than the 20 per cent mark since July 2015.

Foreign currency deposit growth rates also reduced by 16.4 percentage points from 27.6 per cent at the start of the year to 11.2 per cent.

On the other hand, inflation which had been on a steady rise since August 2015, only reduced from 19.2 per cent in March 2016 to 18.7 per cent in April.

Critics of the Bank of Ghana’s tactics may feel somewhat vindicated and raise issues now that its inflation targeting tactics appear to be yielding a reduction of currency in circulation while inflation has been a bit sterner and less responsive.

By Emmanuel Odonkor

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