Diverse MPC moves set African apart


The Reserve Bank of Malawi (RBM) made the biggest adjustment to its interest rate by reducing the policy rate lower by 250 bps. In turn, the regional central bank of the Economic and Monetary Community of Central Africa (CEMAC), the Banque des États de l’Afrique Centrale (BEAC), reduced its tender rate by a much smaller 30 bps, while the Central Bank of Kenya (CBK) decided to leave its main policy rate unchanged. On the other side of the spectrum, the Bank of Ghana (BoG) decided to increase its policy rate by 100 bps.

Malawi’s Monetary Policy Committee (MPC) convened its third meeting of the year on July 8 and cut its policy rate downwards by 2.5 percentage points to 22.5 per cent. The MPC statement noted that the Lombard rate will consequently decrease from 27 per cent to 24.5 per cent.

The central bank expects inflation to continue decelerating. However, while inflationary pressures have certainly lessened over the past few months (and are expected to continue to do so in coming months), this is primarily attributed to foreign exchange inflows connected to the tobacco sector, which in turn has helped stabilise the Malawian kwacha.


Pressure on the exchange rate is expected to return once the tobacco marketing season ends in August.

The Central African monetary authority held its second monetary policy meeting for 2014 on July 8 and decided to cut its tender rate (TIAO) by 30 bps to 2.95 per cent after downgrading its economic growth forecast. The MPC noted that the current pace of real GDP growth in the region – consisting of Cameroon, the Central African Republic, Chad, the Republic of the Congo, Equatorial Guinea and Gabon – was insufficient to tackle poverty.

Policymakers lowered their real GDP growth forecast for 2014 to 6.1 per cent from 6.7 per cent previously. As for inflation, the committee noted that the consumer price index (CPI) is expected to increase by an average of 3 per cent p.a. over the forecast period, in line with the central bank’s target. The slowing economic growth and low inflation environment prompted policymakers to cut interest rates in an attempt to boost GDP growth.    

The BEAC traditionally follows a very prudent approach to monetary policy. This is mainly due to the region’s currency peg. Nevertheless, the BEAC decided to cut rates aiming to spur growth in the non-oil sectors, though it is unlikely this move will be able to make a noticeable difference given the severe lack of access to financing individuals in the region face.

Before this issue is properly addressed, any monetary policy easing will have a negligible impact on the CEMAC economy. As for the impact on the exchange rate, the regional currency (the CFA franc) is pegged to the euro at a fixed rate; the European Central Bank (ECB) cut its marginal lending facility rate by 35 bps to 0.4% during June. As such, the BEAC interest rate cut reduced the interest rate disparity between the regions from 285 bps to 255 bps. There is no danger that the level of the peg will be adjusted in the near future.  

Kenyan policymakers decided to leave its main policy rate unchanged at 8.5 per cent after its meeting on July 8. The MPC noted that consumer price inflation remained within its target range of 2.5 per cent – 7.5 per cent (if only just), the exchange rate has been largely stable, and investor confidence remains high. According to the CBK, its usable level of foreign exchange reserves reached 6.5 billion dollars by July 7 (or 4.34 months of import cover), up from 6.3 billion dollars (4.28 months) at the end of April. The build-up in reserves has been supported by the issuing of the sovereign’s maiden Eurobond, continued foreign investment in the stock exchange, and remittances.

The CBK also set the first Kenya Banks’ Reference Rate (KBRR) at 9.13 per cent, to be reviewed again in January 2015. Commercial banks must price their interest rates by using the following formula: KBRR + k, where k is a measure of a bank’s operating costs, the borrower’s credit profile, and the type of loan product. All new loans awarded from 1 July 2014 onwards must use this formula, while banks will have until 1 July 2015 to recalculate rates on existing loans.

The central bank hopes that, since the central bank rate is a component of the KBRR, the new framework would help to enhance the monetary policy transmission mechanism.

Given that consumer price inflation is edging closer to the upper limit of the bank’s target range, while the real policy rate is heading towards negative territory, we believe there might soon be a change in the central bank’s stance.

Higher money supply and credit growth, lower maize production, a weaker shilling exchange rate, as well as an acceleration in government spending will put upward pressure on inflation in the second half of the 2014. As a result, the central bank may well decide to raise its policy rate in H2.

At its third policy meeting of the year which was concluded on July 9, the BoG decided to increase its policy rate by one percentage point to 19 per cent to contain rising inflation. Ghana’s CPI increased by 15 per cent y-o-y in June, up from 14.8 per cent y-o-y in the previous month. The cedi’s free-fall has continued, with the currency depreciating by around 43.6 per cent y-t-d against the US dollar. The MPC expects inflation to return to the target range of 7.5 per cent – 11.5 per cent by Q4 of 2015.

The central bank’s decision to tighten monetary policy is positive in that it absolutely needed to increase the policy rate to try to win back some credibility, rein in inflation, and stem the cedi’s decline.

On the other hand, it may be counter-productive to address the economy’s woes by monetary measures, as the root cause is the fiscal position. As a result, it is not clear how much of an impact the policy rate increase will have in the absence of substantial fiscal adjustments, which do not seem to be forthcoming.

The increase in the policy rate is likely to lead to even higher Treasury bill yields, making it yet more difficult for the government to finance its deficit.