Monetary policy must reach real economy - BoG Governor

The Bank of Ghana (BoG) is pushing for monetary policy decisions to translate more effectively into borrowing costs, credit conditions and investment across the economy, as it resets key market operations to strengthen the link between central bank actions and activity in the real sector. Governor Dr Johnson Pandit Asiama said the impact of monetary policy extends beyond decisions of the Monetary Policy Committee (MPC), with changes in financial conditions ultimately affecting the ability of businesses, farmers and traders to finance their operations. “A policy decision can influence the cost of borrowing for a small business, the purchasing power of a household, the ability of a farmer to finance the next planting season, or the capacity of a petty trader to restock his or her business,” he said. “It can affect investment, employment, savings and, ultimately, the welfare of citizens.” His comments come as the central bank recalibrates the machinery through which its policy decisions feed into financial markets, including the reintroduction of the 14-day BoG bill as its main instrument for open market operations and the rollout of a new framework governing foreign-exchange operations. The changes put the effectiveness of monetary-policy transmission increasingly at the centre of BoG’s strategy, particularly how quickly decisions taken by the MPC are reflected in market interest rates, liquidity conditions, foreign-exchange movements and ultimately financing conditions across the economy. The strength of that transmission is important to the flow and cost of credit across the economy. Changes in monetary conditions work through money-market rates, bank lending decisions and liquidity before influencing working-capital financing, business expansion and investment; where that process is weak or delayed, changes in the central bank’s policy stance can take longer to influence economic activity. Dr Asiama said closing that gap is central to the Bank’s current approach. “For me, that is what monetary policy modernization is fundamentally about,” he said. “It is not only about better models or more instruments to enhance efficiency and ensure effective policymaking. It is about reducing the distance between the policy we intend, the policy the market understands, and the policy the economy ultimately experiences.” One of the major changes is the return of the 14-day BoG bill as the central bank’s principal instrument for conducting open market operations. The instrument gives BoG a mechanism for managing liquidity at the short end of the financial market, where conditions can influence short-term interest rates and subsequently feed through other parts of the financial system. “We have reintroduced the 14-day bill as our main instrument for conducting OMOs, returning to operations at the very short end of the market where central banks are supposed to operate,” Dr Asiama said. “This shift aims to improve market functioning and enhance the transmission of policy signals.” The move places greater emphasis on ensuring that the policy stance determined by the MPC is reflected in actual financial conditions rather than remaining principally a signal from the central bank. The eventual effect of monetary policy depends not simply on the level of the policy rate, but on how financial institutions and markets respond through lending rates, deposit rates, liquidity allocation, credit decisions and investment. A stronger transmission mechanism could therefore make changes in BoG’s policy stance more consequential for financing and investment decisions across the economy. BoG is simultaneously changing how it operates in the foreign-exchange market, another major channel through which monetary conditions feed into commercial activity. The central bank has introduced a new Foreign Exchange Operations Framework that establishes a rules-based approach to its interventions in the FX market. “The framework clarifies the objectives of our interventions, supports reserve accumulation, and helps reduce excessive volatility while maintaining a flexible, market-determined exchange rate,” Dr Asiama said. The framework has implications for an economy where exchange-rate movements can quickly alter the cost of imported raw materials, machinery, fuel and other production inputs, with subsequent effects on pricing, margins and investment decisions. Greater clarity around BoG’s intervention strategy could also give market participants a clearer basis for interpreting central bank activity in the FX market, while allowing the Bank to continue accumulating reserves without committing to defending a particular exchange rate. Together, the 14-day bill and FX framework amount to changes on two fronts that matter directly to economic activity: the domestic cost of money and conditions in the foreign-exchange market. The Bank is also increasing its reliance on high-frequency information to identify price pressures earlier and strengthen the information available for monetary-policy decisions. Dr Asiama disclosed that BoG is now using an electronic inflation measure calculated almost in real time to supplement its assessment of price developments. “Our e-inflation measure is computed almost in real time, providing valuable insights into current price developments and strengthening our now-casting and near-term inflation forecasts,” he said. “These tools allow us to identify emerging trends more quickly and assess the underlying risks to the inflation outlook.” BoG has additionally upgraded its Quarterly Projection Model to incorporate sector-specific developments and improve its ability to construct economic baselines, test alternative scenarios and assess risks. The Governor said monetary policy is inherently forward-looking, creating a challenge because much of the conventional economic information available to policymakers describes activity that has already occurred. “The task is therefore to identify emerging pressures early enough and form a good view of where inflation and activity are heading,” he said. The reforms follow a sharp decline in inflation, which DrAsiama said had fallen sufficiently to overshoot the central bank’s medium-term target.Source: economytimesnews.com
« Previous | Next »