The highs and lows of interest rates in Africa

by Christie Viljoen 0

In a week where interest rate changes announced by the European Central Bank (ECB) were the focus of international financial media, Africa has also witnessed a few monetary policy developments in recent weeks.

Following its meeting on May 29, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) decided to keep its lending rates unchanged.

Analysts were split on whether the bank would hold rates, or cut them in an attempt to stimulate economic activity. However, as the policy stance is already accommodative, and as pressure on the exchange rate has been building in recent weeks, the bank decided not to cut rates further.

Since the coup in July 2013, the exchange rate was kept remarkably steady thanks to Arab aid inflows. Since the end of April, though, the central bank has allowed the pound to depreciate by 2.1 per cent to reduce the currency’s overvaluation.

Given the strong support Egypt is expected to receive from Arab countries, the CBE should be able to continue to manage the pound, thereby ensuring that upward pressure on inflation remains contained. Another positive factor is that money supply growth has stabilised this year, mainly due to an easing in government borrowing from the central bank.

The Central Bank of Swaziland’s (CBS) Monetary Policy Consultative Committee (MPCC) held its latest bi-monthly meeting on May 23. Policymakers indicated that the short-term outlook for inflation includes notable upside pressures after the headline rate increased from 4.7 per cent y-o-y in February to 5.1 per cent y-o-y during March.

Upward pressure stems from a long-awaited upward adjustment in fuel prices during March, a 25 per cent increase in public transport fares approved by Parliament, and a 9.5 per cent increase in electricity tariffs as of May. Nonetheless, the MPCC decided to keep the discount rate unchanged at 5 per cent in order to support the country’s economic activity.

The CBS indicated that its gross reserves stood near 795 million US dollars on May 16, down from around 825 million US dollars recorded a week earlier. The decline was attributed to the payment of external obligations on behalf of the Swazi government – a regular and legitimate transaction on the part of the central bank. The CBS estimated that its reserves provided import cover of 4.1 months during mid-May. In a separate development, the CBS is looking into taking legal action against several South African media houses who incorrectly reported that Swaziland’s foreign reserves fell to below 1 million US dollars last month.

The Bank of Zambia (BoZ) raised its overnight lending rate on June 2 to cap off a series of aggressive monetary policy tightening actions in recent months. The central bank raised the overnight lending rate to 10 percentage points above the policy rate, an action that constitutes a four percentage point increase in the overnight lending facility rate to 22 per cent.

The BoZ raised the benchmark policy rate by a cumulative 225 bps during the first four months of the year, while the statutory reserve ratio was raised by 600 bps to 14 per cent in March.

In recent months, the monetary regulator has tightened the belt considerably as inflation remained stubbornly above target. At present, our inflation projection indicates that Zambia may miss its year-end inflation target of 6.5 per cent by a decisive margin, which will make it a third consecutive year of not meeting the stated year-end target.

Strong government expenditure, substantial fiscal overruns and sovereign borrowing to meet budgetary needs have created an environment where the central bank has to tighten monetary policy to curb inflationary pressure. High borrowing costs may crowd out the private sector, which has already faced substantial increases in administered costs.

The Bank of Uganda (BoU) cut the country’s benchmark interest rate on June 4 following subdued price inflation figures for May. Consumer price inflation declined from 6.7 per cent y-o-y in April to 5.4 pre cent y-o-y last month as a result of the drop in food crop inflation.

The BoU noted that the balance of risks to the country’s economic outlook remains tilted towards lower inflation and sluggish economic growth. Consequently, the central bank decided to cut the country’s benchmark interest rate by 50 bps to 11 per cent. This is the first cut since a 50 bps cut in December 2013.

The BoU concluded that the accommodative monetary policy stance should provide support to domestic demand, and help economic growth to strengthen over time. The central bank indicated that downside risks to economic growth include the continued weak performance of the agricultural sector and political instability in some of Uganda’s major trading partners. In turn, the BoU stated that upside risks to inflation stem from volatility in prices of tradable goods coming from the possible depreciation of the shilling exchange rate.

However, given the relationship between agricultural production and inflation, the downside economic growth risk also translates into upside inflation risk. In addition, the shilling has been under increasing pressure in recent weeks, which should translate into higher imported inflation going forward.