- Nigeria, South Africa, Egypt, Morocco, and Kenya are all expected to raise borrowing costs within the next two weeks
- In contrast, monetary authorities in countries such as Ghana and Angola, where inflation is on a downward trend, are expected to maintain current rate
- US monetary tightening could slow due to banking turmoil, weakening demand for the dollar.
Major central banks in Africa are preparing to raise interest rates in order to combat persistent inflation and prevent a sell-off in their assets exacerbated by an uncertain financial system following the recent collapse of US lender Silicon Valley Bank and stress at Credit Suisse Group AG.
Nigeria, South Africa, Egypt, Morocco, and Kenya are all expected to raise borrowing costs within the next two weeks.
In contrast, monetary authorities in countries such as Ghana and Angola, where inflation is on a downward trend, are expected to maintain current rates. Six smaller African economies will take varying approaches to controlling prices and managing the contagion caused by the global banking crisis.
The recent crisis has resulted in a decrease in the value of government dollar bonds in Africa, with yields on the average security increasing by 164 basis points to 14.36%, which is the highest level since November 3rd 2022.
All bonds in the index are rated as junk. While investors have generally been moving towards the safety of bonds, they have preferred higher-quality credit and sold sub-investment grade securities.
Weaker Dollar = More Investments
The Federal Reserve’s rate path will also be a key factor in decision-making. An expected slowdown in monetary tightening in the US due to the banking turmoil could weaken demand for the US dollar, which would reduce the cost of servicing developing nations’ dollar-denominated debt, lower the cost of imports, and attract more international investment.
Africa Economic policies 2023
The South African Reserve Bank remains committed to its fight against inflation, despite global banking system weaknesses. As the policymakers approach the end of the interest-rate hiking cycle, they are expected to raise the benchmark by 25 basis points to mitigate potential risks to the inflation outlook.
This move is deemed necessary by Sanisha Packirisamy, an economist at Momentum Investments, who notes the knock-on effects of a weaker currency, with the rand depreciating approximately 7% against the dollar this year.
The average SA inflation expectations for the year stand at 6.3%, significantly above the central bank’s 4.5% target. Although traders have scaled back on bets for a quarter-point increase, this is consistent with expectations of less tightening by the Fed after the SVB’s collapse.
The South African MPC may look towards the European Central Bank for direction, which recently delivered a 50 basis-point hike. Packirisamy notes that this move is indicative of the ECB’s commitment to fight inflation while also offering support to the financial sector through financial stability tools if necessary.
According to Euriteca Andre, an economist and university lecturer, the Banco Nacional de Angola’s monetary policy committee is likely to maintain its key interest rate after implementing a 150 basis-point reduction in January, marking its steepest cut since July 2018.
Meanwhile, policymakers in Nigeria are anticipated to extend their longest phase of monetary tightening in over a decade to curb inflation, which remains close to an 18-year peak, as stated by Mohamed Abu Basha, head of macroeconomic research at Egyptian investment bank EFG Hermes. Since May 2022, rates have increased by a cumulative 6 per cent points.
In Morocco, the Bank Al-Maghrib plans to raise interest rates for a third successive meeting to combat inflation, which has exceeded its 3.9% target for 2023 due to an acute drought and growing input expenses, reaching a 30-year high. After increasing the benchmark interest rate by a combined 14.5 percentage points since November 2021, the Bank of Ghana’s MPC is expected to remain unchanged, according to economists surveyed by Bloomberg.
To battle inflation and safeguard the local currency, which has depreciated over 4% against the dollar since January, Kenyan policymakers are likely to raise the key rate.
Meanwhile, Egypt’s central bank is anticipated to implement a significant rate hike due to quicker-than-anticipated inflation and record-breaking food prices fueled by a series of currency devaluations in the Middle East’s most populous country.
Harare-based economist Prosper Chitambara expects Zimbabwe to reduce the world’s highest interest rate for the second time this year, citing the adoption of blended consumer prices, which monitors costs in US and Zimbabwean dollars rather than just the local currency. As a result, he believes that inflation will continue to decelerate
According to Gerrit van Rooyen, an economist at Oxford Economics Africa, neighboring Mozambique will maintain its benchmark interest rate despite double-digit inflation persisting until the first half of 2023. This is partly due to the damage caused by Cyclone Freddy. Despite the increase in inflation, the MPC’s proactive measures have resulted in Mozambique’s real interest rate being one of the highest in Africa.
Meanwhile, Eswatini and Lesotho, whose currencies are tied to South Africa’s rand, are expected to follow the Reserve Bank’s decision. On the other hand, Mauritius and Seychelles, two island nations, are likely to maintain their current key rates. Seychelles’ inflation rate is nearing a three-year low, and price growth in Mauritius is slowing down after five consecutive rate hikes.
However, Bhavik Jugurnath, an independent economist, cautions that hiking interest rates could be challenging in light of the instability within the global banking system following the collapse of Silicon Valley Bank. He suggests that the MPC might want to wait for at least a quarter and observe the situation before making any decisions.