Will African central banks keep on cutting interest rates?
Very few countries have space to ease monetary policy further, given continued exchange-rate pressures and rising inflation, one economist says
After aggressive interest-rate reductions to shore up their economies against the havoc wrought by the coronavirus pandemic, central bankers in most Sub-Saharan African countries will ask themselves whether the cutting cycle is over when they meet over the next nine days.
SA's monetary policy committee may take advantage of the scope to lower its benchmark rate even further, while those in Nigeria, Angola, Ghana and Kenya contend with currency weakness and rising consumer prices.
“Very few countries have space to ease monetary policy further, given continued exchange-rate pressures and rising inflation,” said Ayomide Mejabi, chief economist for Sub-Saharan Africa at JPMorgan Chase Bank NA.
“Although core inflation has remained relatively stable, increased monetisation of fiscal operations, given wider deficits brought on by the pandemic, likely will result in rising price pressures in coming months.”
Here’s what central bankers in the region may do this month:
SA — July 23: Repurchase rate 3.75%; inflation 2.1% (May)
SA's central bank is likely to lower its benchmark interest rate for a fifth time in as many meetings, albeit by a smaller margin.
After aggressive cuts that took the repurchase rate to the lowest level since it was introduced in 1998, the MPC will probably revert to moving in 25 basis-point increments as it seeks to rely on data to assess the damage caused by the virus, said Sanisha Packirisamy, an economist at Momentum Investments.
While inflation has dropped below the Reserve Bank’s target band for the first time since 2005, the MPC projected such a breach for the second and third quarters, and governor Lesetja Kganyago said in June the panel would only step in if this proved to be persistent. Forecasts show inflation will pick up into 2021, which could lead to negative real interest rates.
“The Reserve Bank is quite hesitant to run negative real interest rates for a protracted period — we’ve seen in a number of other economies that it can be quite bad for bank profitability and general financial stability,” Packirisamy said.
“That can also prevent them from cutting a lot further than what the market would maybe want to see.”
Angola — July 24: BNA rate 15.5%; inflation 21.78% (Luanda, June)
Angola’s central bank hasn’t cut its policy rate this year and is unlikely to do so now, even as the economy faces a triple shock due to the virus, a steep decline in oil prices and a reduction in crude output to meet its Opec+ commitment. That’s because consumer prices have been fuelled by the kwanza that’s lost 15% of its value against the dollar this year.
“At the current juncture, what the National Bank of Angola should be doing is what many central banks have done: provide liquidity to the economy to face the crisis,” said Carlos Rosado de Carvalho, an economist at the Catholic University of Angola.
“But this is not possible due to rising inflation.”
Ghana — July 27: Policy rate 14.5%; inflation 11.2% (June)
Ghanaian policymakers will probably keep the key rate at an eight-year low for a second meeting. Inflation breached the upper end of the central bank’s target for a third straight month in June, but the MPC expects it to return to within the 6% to 10% band by the end of the year.
“Ghana, like many other countries in the region, is not out of the woods yet; coronavirus infections are much more than what they were at the last MPC,” said Courage Boti, an Africa economist at Accra-based Databank Group.
“That will drive the decision and they will want to hold the rate.”
The central bank may wait six months before it considers raising rates, Governor Ernest Addison said in June.
Kenya — July 29: Central bank rate 7%; inflation: 4.6% (June)
Kenya’s central bank will probably leave its key rate unchanged for a third consecutive meeting even with inflation that’s been within the target range for almost three years.
While the MPC has further firepower, successive cuts earlier this year and a downward revision of the cash reserve ratio for commercial banks have helped the bank achieve its goal of boosting private-sector credit growth, said Renaldo D’Souza, Sterling Capital’s head of research.
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