Increment in interest rate promotes economic growth while keeping inflation low and stable - Economist

The Director of the Quality Assurance unit at the Methodist University College Ghana, Mr. Charles Daniel Kwadwo Opoku, has said that the increased rate by the Monetary Policy Committee (MPC) of the Bank of Ghana to promote economic growth while keeping inflation low and stable is in the right direction.

He disclosed this in an interview with Wenchi-based Radio West Africa 92.5 MHz and monitored by soireenews.com. On the sidelines, the MPC decided on a 300 basis points increase in the Monetary Policy Rate to 22 percent.

Mr. Opoku further explained that contemporary economic theory assumes that raising interest rates reduces growth in aggregate demand in the economy through the reduced effect of money supply, which leads to lower inflation.

According to him, the assumption rests on demand-pull effects, which also suggests that raising interest rates reduces consumer spending and investment because the cost of borrowing increases, and saving becomes a more attractive option.

The increase in savings reduces the supply of money in circulation, curbs inflation, and increases the value of the cedi, he asserted.

The Monetary Policy Committee (MPC) on Wednesday, August 17, 2022, held an extraordinary meeting to review recent developments in the economy and assess risks to the outlook of the Ghanaian economy. The committee took note of the increased inflation in July and the heightened pressures in the foreign exchange market.

This increase simply means that borrowing from the Bank of Ghana by commercial banks is now more expensive. This will translate into higher interest rates on loans to the general public leading to a reduction in borrowing. This also means that participating in government Treasury bills is lucrative. Money is therefore siphoned from the system, leading to a fall in aggregate demand and hence a slowdown in inflation.