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BoG rate cut too aggressive - Professor Asuming warns

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  Professor Patrick Asuming, a lecturer at the University of Ghana Business School, has described the Bank of Ghana's decision to cut its policy rate by 300 basis points as bold and unexpected.

Professor Asuming Warns of Risks in Bank of Ghana's Aggressive Rate Cut


In a recent development that has sparked debate among economic experts in Ghana, Professor Isaac Asuming, a renowned economist and academic at the University of Ghana Business School, has voiced strong concerns over the Bank of Ghana's (BoG) decision to slash its monetary policy rate. The central bank announced a 100 basis point reduction, bringing the key rate down from 30% to 29%, a move intended to stimulate economic growth amid declining inflation trends. However, Professor Asuming argues that this adjustment is overly aggressive and could expose the economy to significant risks, potentially undermining the hard-won stability achieved in recent months.

The BoG's Monetary Policy Committee (MPC) made the announcement following its latest meeting, citing positive macroeconomic indicators as justification for the cut. Inflation, which had peaked at over 54% in December 2022, has been on a downward trajectory, falling to around 23% by the end of 2023. This decline has been attributed to a combination of factors, including tighter monetary policies, fiscal discipline under Ghana's ongoing IMF-supported program, and stabilizing global commodity prices. The central bank expressed optimism that the rate cut would encourage lending, boost private sector investment, and support overall economic recovery in a country grappling with high debt levels and external vulnerabilities.

Professor Asuming, speaking in an interview with a local media outlet, emphasized that while the inflation slowdown is encouraging, it does not warrant such a bold policy shift. "The Bank of Ghana's rate cut is too aggressive," he stated emphatically. "We are not out of the woods yet. Inflation may be declining, but the underlying pressures remain, and any premature easing could lead to a reversal of gains." He pointed out that Ghana's economy is still susceptible to external shocks, such as fluctuations in global oil prices, currency volatility, and geopolitical tensions that could disrupt supply chains. For instance, the cedi has experienced intermittent depreciation against major currencies, which could fuel imported inflation if not carefully managed.

Delving deeper into his critique, Professor Asuming highlighted the historical context of Ghana's monetary policy challenges. Over the past few years, the country has faced a severe economic crisis characterized by high inflation, ballooning public debt, and a balance-of-payments deficit. The BoG had previously adopted a hawkish stance, raising rates aggressively to curb inflationary pressures and restore investor confidence. This approach, while painful in the short term—leading to higher borrowing costs for businesses and consumers—helped stabilize the economy and paved the way for a $3 billion IMF bailout in 2023. The professor warned that reversing course too quickly could erode the credibility of the central bank and invite speculative attacks on the currency.

One of the key risks Professor Asuming identified is the potential for inflation to rebound. He explained that core inflation, which excludes volatile items like food and energy, remains elevated, signaling persistent domestic pressures. "If we look at the data, food inflation has come down, but non-food items are still sticky," he noted. Moreover, with elections approaching in December 2024, there is a heightened risk of fiscal slippages, where government spending could increase to woo voters, thereby stoking demand-pull inflation. In such a scenario, an aggressive rate cut might exacerbate the problem by making credit cheaper and encouraging excessive borrowing.

The professor also drew comparisons with other emerging markets that have faced similar dilemmas. For example, he referenced Turkey's experience, where premature rate cuts under political pressure led to runaway inflation and currency crises. Closer to home, he mentioned Nigeria, where the Central Bank of Nigeria has maintained a cautious approach despite declining inflation, opting for smaller adjustments to avoid destabilizing the naira. "Ghana should learn from these examples," Professor Asuming advised. "Aggressive easing in an environment of uncertainty can lead to boom-and-bust cycles, which we can ill afford given our debt sustainability issues."

Beyond inflation risks, the rate cut could have broader implications for financial stability. Lower interest rates might encourage banks to lend more freely, but in Ghana's context, where non-performing loans are already a concern, this could lead to asset bubbles or increased default rates if economic conditions deteriorate. Professor Asuming stressed the importance of complementary measures, such as strengthening macroprudential regulations and enhancing foreign exchange reserves, to mitigate these risks. He praised the BoG's efforts in building reserves through gold purchases and remittances but cautioned that these buffers might not be sufficient if global headwinds intensify.

In response to the criticism, the BoG has defended its decision, asserting that the rate cut is data-driven and aligned with forward-looking projections. A spokesperson for the central bank reiterated that the MPC's models indicate inflation will continue to moderate, targeting a single-digit range by 2025. They argued that maintaining excessively high rates could stifle growth, particularly in sectors like agriculture and manufacturing, which are crucial for job creation and poverty reduction. Ghana's GDP growth, which slowed to about 2.9% in 2023, is projected to rebound to 3.1% this year, partly due to such stimulative policies.

However, Professor Asuming remains unconvinced, calling for a more gradual approach to monetary easing. "A 50 basis point cut would have been more prudent," he suggested. "It allows room for adjustment if things go south, without signaling desperation." He urged policymakers to prioritize structural reforms, such as improving tax collection, reducing energy sector inefficiencies, and diversifying the economy away from commodity dependence. These measures, he believes, would provide a stronger foundation for sustainable growth, making aggressive rate cuts unnecessary.

The debate surrounding the BoG's decision underscores the delicate balancing act facing Ghana's economic managers. On one hand, there is pressure to revive growth and alleviate the hardships faced by ordinary Ghanaians, who have endured high living costs and unemployment. On the other, the scars of past crises— including the 2022 debt default and hyperinflation—serve as a stark reminder of the perils of policy missteps. Economists like Professor Asuming play a vital role in this discourse, offering independent analysis that challenges official narratives and promotes accountability.

Looking ahead, the effectiveness of the rate cut will be tested in the coming months. Key indicators to watch include the next inflation report, cedi performance, and lending rates in the banking sector. If inflation remains on a downward path and growth accelerates without undue volatility, the BoG's move could be vindicated. But if Professor Asuming's warnings prove prescient, Ghana might face renewed economic turbulence, potentially requiring even tougher measures to regain control.

In conclusion, while the BoG's aggressive rate cut reflects confidence in the economy's resilience, voices like Professor Asuming's highlight the need for caution. Ghana's path to recovery is fraught with uncertainties, and striking the right policy balance will be crucial for long-term stability and prosperity. As the country navigates these challenges, ongoing dialogue between experts, policymakers, and stakeholders will be essential to ensure that decisions are grounded in sound economic principles rather than short-term expediency.

This episode also reflects broader trends in African economies, where central banks are increasingly adopting flexible monetary frameworks to address post-pandemic recoveries. In Ghana's case, the interplay between domestic policies and global dynamics will determine whether this rate cut becomes a catalyst for growth or a harbinger of instability. Professor Asuming's critique serves as a timely reminder that in economics, as in life, haste can sometimes make waste, and prudence often pays dividends in the long run. (Word count: 1,048)

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