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Rising inflation and weak currencies to drive rate hikes in Africa

Published by
Nonhlanhla P Dube

Countries with greater access to global markets through asset flows, such as South Africa and Kenya, are poised to raise borrowing costs.
African central banks are stepping up their efforts to combat high inflation and currency weakness, with four of the six monetary policy committees expected to raise interest rates in the next two weeks.

The banks’ dialogues will almost certainly continue to revolve around rising food, fertilizer, and energy prices caused by supply shortages caused by Russia’s war with Ukraine. The ongoing economic impact of the coronavirus pandemic, risks posed by a slowing Chinese economy, expectations of more aggressive Fed rate hikes, and fears of a global recession, which have increased investor appetite for dollars and led to a sell-off of African debt, will all be discussed. Countries such as South Africa and Kenya, which are more connected to global markets via asset flows, are preparing to raise borrowing costs. Angola, one of the few global outliers with slowing inflation, is expected to keep its key rate unchanged.

Here are some options for central bankers:

Nigeria, July 19
The policy rate is 13%.
18.6 % inflation rate (June)
Inflation is expected to range between 6% and 9%.
Inflation has risen faster than expected since the last MPC meeting of the Central Bank of Nigeria. According to Oyinkansola Samuel, an analyst at FirstRand Ltd.’s unit RMB Nigeria Ltd., it is likely to remain elevated due to higher diesel costs and persistent shortages of gasoline and forex. This could strengthen the MPC’s resolve to raise the key interest rate for the second time in a row.

“It is not unlikely that we may see a 25 to 50 basis-point hike,” Samuel said.  RMB sees the benchmark rate at 14% by year-end, she said. Four of the seven economists polled by Bloomberg predict a rate hike.

South Africa, July 21st
4.75 % repurchase rate
6.5 % inflation rate (May)
Output inflation should be between 3% and 6%. South Africa’s central bank will continue to tighten monetary policy aggressively in the face of deteriorating inflation expectations, currency weakness, and pressure to keep up with an increasingly hawkish Fed.

After breaching the Reserve Bank’s target range for the first time in more than five years, inflation is expected to accelerate to levels last seen during the global financial crisis, which sent the rand into freefall. While the MPC prefers to keep inflation expectations close to 4.5 %, increased risks to economic growth, such as flood damage in the province’s second-largest contributor to GDP and deeper, more frequent rolling blackouts, will influence decision-making.

Different data points that support dovish and hawkish stances indicate that “there’ll likely be a diversity of views on the MPC and thus room for surprises,” according to Peter Worthington, the senior economist at Absa Bank Ltd. It could also be the fifth consecutive meeting with split votes among the five-member panel.

In a Bloomberg poll, 13 economists, including Worthington, predict a second consecutive half-point increase, with the rest expecting a larger 75 basis-point increase. Investors have fully priced in a half-percentage-point increase, but expect a greater increase.

Ghana, July 25th.
The policy rate is 19%.
29.8 % inflation rate (June)
Inflation target: 8% +/- 2 ppts After raising its key rate by 450 basis points this year, Africa’s second-most aggressive central bank, after Zimbabwe, will likely pause its rate hike cycle.

While inflation remains well above the central bank’s target range, it increased at a slower pace in June. According to Courage Martey, an economist at Accra’s Databank Group, this, combined with an economy that underperformed expectations in the first quarter and is facing additional headwinds, gives the MPC a strong reason to keep the policy rate unchanged.

The government approached the International Monetary Fund for a bailout this month due to deteriorating economic conditions exacerbated by the Ukraine war and US monetary tightening.

Kenya, July 27.
The central bank rate is 7.5 %.
7.9 % inflation rate (June)
Inflation target: 5% +/- 2.5 ppts Rising price pressures, rising bond yields, and currency weakness in Kenya will almost certainly prompt a second straight rate hike.

“Further tightening of 25 to 50 basis points is expected to counter price growth,” Wangari Muikia, managing director of Nairobi-based EGCL Institute, said. The MPC’s ability to use alternative tools to cool inflation, such as open market operations and raising banks’ reserve requirements, has been hampered by apparent dollar shortages, she claims.

Mozambique, July 27th.
15.25 % MIMO interbank rate
10.8 % inflation rate (June)
The Banco de Mocambique will most likely raise its benchmark rate to combat inflation that has risen above 10% for the first time in nearly five years. Protests and a World Bank pledge to subsidize public transportation users have resulted from rising prices.

Annual inflation is expected to quicken to about 12 % in the third quarter because of higher food and transport prices, said Ridle Markus, a strategist at Absa Bank Ltd. “As a result, we anticipate another 75 basis point hike in the policy rate at the July meeting.” This would be the second increase this year, following a 200 basis point increase in March.

Angola, July 29.
The BNA rate is 20%.
22.96 % inflation rate (June) According to Wilson Chimoco, an economist at the Catholic University of Angola, the central bank of Africa’s second-largest oil producer is likely to leave its key rate unchanged for a sixth consecutive meeting to see if the downward trend in inflation continues.

A steady kwanza against the dollar, boosted by high oil prices and credit-rating upgrades, has helped keep annual inflation in check, which slowed to its slowest pace this year in June.

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Nonhlanhla P Dube

Nonhlanhla P Dube is a senior news reporter at Rateweb. Nonhlanhla is a student of International Relations at the University of South Africa. She reports primarily on personal finance and economics. You can contact her directly by email at nonhlanhla@rateweb.co.za

Published by
Nonhlanhla P Dube
Tags: Africa
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