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African central banks urged to work towards monetary policy credibility

The second deputy governor of the Bank of Ghana (BoG), Dr. Johnson P. Asiama, has charged African central banks to ensure monetary policy credibility by removing all technical and political constraints which are pervasive within the African central banking context.

According to the Dr. Asiama, this is crucial for attaining monetary policy objectives, particularly in a rational environment where economic agents have full information on how the economy works.

The move, according to the governor, is also expected to help eliminate all the negative perception including corruption and lack of transparency and the institutional capacity which have become some of the major challenges that need to be tackled head-on with clear cut policies.

Delivering the opening address at a three-day conference of Association of African Central Banks in Accra, Dr. Johnson P. Asiama, the second deputy governor of BoG said there is the need to build monetary policy credibility to support monetary policy making.

“There is the need to build monetary policy credibility, especially in a number of African central banks to support monetary policy making. Efforts must be made to remove both technical and political constraints which are pervasive within the African central banking context. Some of these technical constraints include data unreliability and untimeliness with monetary policy decision or forecasts, over-optimistic policy objectives, and uncontrollability of policy instruments.”

“Political constraints such as inadequate legislation to back the operational independence of the central bank also hinder policy credibility. Addressing these constraints would require financial and technical support to state institutions that generate the economic and financial data, and constitutional, legislative and operational reforms to strengthen monetary policy formulation,” he stated.

He explained that monetary policy credibility in several advanced economies has been the cornerstone for anchored inflation expectations and lower variability of monetary policy outcomes as market participants believe the central bank’s commitment to achieving its policy objectives.

Dr. Asiama further stated that credibility should not prevent flexibility as the central banks pursue the policy of credibility.

He emphasised that monetary credibility is a “solution to the time dynamic inconsistency problem where the expectations of economic agents are shaped by the actions or inactions of the central bank in the delivery of its mandate.”

“In Africa, the time dynamic inconsistency problem is made worse by fiscal dominance and inadequate central bank operational autonomy,” he lamented.

The 2017 continental seminar which was on the theme: “Credible Communication Strategies of Central Banks in the Framework of Monetary Policy and Financial Stability” saw the second deputy governor of Ghana’s central bank also call for effective central bank communication strategy which will promote transparency and policy credibility that underpin forward-looking monetary policies and market-based prudential regulations.

According to him, as central bankers, “we must appreciate new communication trends and develop communication strategies to leverage existing media technology to build confidence of market players. African central banks should also develop a framework for comprehensive education packages to improve financial literacy across all the sectors of the economy. This will enhance market appreciation of monetary policy decisions and central bank actions for appropriate response.”

He however, admitted to communication challenges in some African countries for the central banks which he said contributes to the potential for central bank actions and inactions to be misrepresented and in the process, erode the central bank’s reputation and lower market and public confidence in monetary policy decisions.