By Donasius Pathera, PhD:
In sub-Saharan Africa, central banks are focusing on price stability as the main aim of monetary policy, but their efforts are not consistent.
Many still pursue other goals such as economic growth, financial development and foreign market competitiveness.
This unclear policy focus leads to erratic monetary policies, with conditions sometimes relaxed to meet certain goals, then tightened later due to inflation worries.
One big issue is the important role of managing exchange rates in policy strategies, even in places with some exchange rate flexibility.
In some countries, exchange rate stability is seen as more important than price stability, which can cause misalignments and hurt the credibility and effectiveness of monetary policy.
This problem is worsened by the absence of a clear medium-term inflation target in many countries, which hampers policy discipline and makes it easier for political influences to dictate decisions.
Additionally, many do not have a solid plan to manage competing goals without harming price stability.
The operational approach in the region still largely relies on reserve money targeting (RMT), a method taken from International Monetary Fund programmes focusing on central bank balance sheet targets.
Some central banks are using policy interest rates to show their policy direction, but this is inconsistent, leading to frequent differences between targets and actual outcomes.
Consequently, the direction of monetary policy often lacks clarity and policy transmission becomes ineffective, especially with repeated interventions in foreign exchange markets.
A key problem in monetary policy systems in the region is the lack of a forward-looking plan and clear communication for policy decisions.
This gap reduces the capability to deal with inflation changes and react to outside influences, like rises in commodity prices.
When there is a mismatch between policy goals and what is actually done, it often causes confusion and weak policy actions.
Despite these issues, efforts are ongoing to modernise monetary policies in the region.
A main takeaway is the need for central banks to have operational independence and clear goals for price stability.
Central banks can advance in different areas and, at the same time, reform needs to be thorough, combining strategy, operation and communication. Managing exchange rates is still a vital concern for many nations, especially those with flexible exchange rates.
Central banks in these countries have to manage complex monetary policies that balance local stability with international financial conditions. As these nations improve their monetary systems, the significance of exchange rates has increased, with a stronger focus on price stability in monetary policy. Even with this change, managing exchange rates is crucial for lessening economic swings and outside shocks.
Countries have made significant strides in moving towards more flexible exchange rates, with a growing recognition that the exchange rate sh
