The currencies of Angola, Nigeria and Ghana have underperformed in Africa this year
With one notable exception, African central banks that will be setting interest rates in the coming three weeks are not likely to follow the global relaxing trend and stick to strict monetary policies.
According to Angelika Goliger, chief economist at EY Africa, “the broader theme is one of caution and data dependence with central banks closely monitoring inflation and currency trends.”
The two biggest oil producers in sub-Saharan Africa, Nigeria and Angola, who are currently dealing with double-digit inflation and depreciating local currencies, are predicted by analysts to raise their benchmark rates.
However, Mozambique, an anomaly, is expected to keep cutting borrowing costs, while South Africa, Egypt, Kenya, and Ghana are expected to hold onto their policy rates.
For extended periods, the majority of these African countries will maintain tighter interest rates for the following reasons:
Currency Pressures
The currencies of Angola, Nigeria and Ghana have underperformed in Africa this year, and despite rising demand for the US dollar, their downward trend against it is still continuing.
There has been a notable price pass-through. It has maintained inflation in Nigeria at a nearly three-decade high. It has caused Angola’s inflation rate to soar to a seven-year high, while in Ghana, it has meant that the pace of deflation has not been as rapid as the central bank had predicted.
These countries’ high rates of inflation put strain on their public coffers, prompting Angola to raise its minimum salary to 70,000 kwanza ($79) in June and Nigeria to partially restore gasoline subsidies.
These central banks’ tougher posture would probably be required for a longer period of time due to factors like weak currencies, lax fiscal policy, and cost-push pressures, according to Gbolahan Taiwo of JPMorgan Chase & Co.
As Governor Olayemi Cardoso recently emphasized, the monetary policy of the central bank will take all necessary measures to control inflation.
Sticky Inflation
Due to stubborn price pressures, South Africa and Egypt are expected to maintain their key interest rates at 8.25% and 27.25%, respectively, on Thursday.
Governor Lesetja Kganyago of the South African central bank has made it clear that he and his MPC colleagues will not be willing to decrease rates unless inflation sustainably returns to the 4.5% middle of the target range.
The annual inflation rate has remained over the midpoint for more than three years, even if it only held at 5.2% in May.
Kganyago stated that “it is important that we rebuild confidence in our ability to achieve our target” in a statement included in the central bank’s annual report that was released last month.
The fact that annual inflation, which dropped for a fourth consecutive year in June, is still high at 27.5% and that variables like salary rises and changes in fuel prices could delay the pace of disinflation means that Egyptian authorities will likewise be hesitant to lower interest rates, according to Goliger.
Additionally, Taiwo stated that they would prefer to hold off on making a cut until “inflation to fall more meaningfully and achieve a higher level of ex-post real rates.”
Domestic Factors
Kenya is unlikely to lower borrowing prices as well, given the continuing anti-government protests that may put a stop to the country’s deflationary efforts. Following the government’s abandonment of a proposal to collect up to 346 billion shillings ($2.7 billion) in taxes, the protests have forced companies to close and reopened currency pressure.
According to Taiwo, the MPC has included the US Federal Reserve’s interest rate choices as a significant risk factor for monetary policy. This could imply that it will wait to cut rates until the US does. Investors anticipate at least two rate cuts from the Fed this year.