Central banks in Africa’s largest economies are poised to raise interest rates this month to contain stubborn inflation and avoid an asset sell-off, exacerbated by the collapse of US lender Silicon Valley Bank and the stress at Credit Suisse Group AG.
Nigeria, South Africa, Egypt, Morocco and Kenya are expected to raise borrowing costs in the next two weeks.
Monetary authorities in countries such as Ghana and Angola, where inflation is falling, are expected to hold firm. Six smaller African economies will take different approaches to bring prices under control and deal with the contagion from the global banking crisis.
A gauge of government bonds in Africa has fallen every day for the past seven days, pushing the return on the average security across the continent by 164 basis points to 14.36%. That is the highest level since November 3. All bonds in the index are rated junk.
While investors have rushed to the safety of bonds in general during the crisis, they have favored quality credit and sold sub-investment grade securities.
The Federal Reserve’s interest rate path will also play a key role in decision-making. An expected slowdown in US monetary tightening due to the banking turmoil could weaken demand for the greenback, lowering developing countries’ costs of servicing their dollar-denominated debt, making their imports cheaper and helping them help attract more international investment.
South Africa, March 30
Buyback rate: 7.25% Inflation rate: 6.9% (Jan) Inflation target: 3%-6%
The South African Reserve Bank’s battle against inflation is unlikely to be derailed by weakness in the global banking system.
Policymakers approaching the end of the rate hike cycle will likely raise the benchmark by 25 basis points to address potential risks to the inflation outlook, said Sanisha Packirisamy, an economist at Momentum Investments. They include the knock-on effects of a weaker currency, with the rand weakening about 7% against the dollar this year.
Average inflation expectations for the year stand at 6.3%, well above the central bank’s target of 4.5%.
While traders are betting on a quarter-point gain, that’s broadly in line with the Fed’s expectation of less tightening following the collapse of the SVB.
South Africa’s MPC could follow the direction of the European Central Bank, which passed a 50 basis point increase last week. The ECB “made a loud statement to markets to suggest that fighting inflation is their top priority, but they stand ready to support the financial sector through financial stability tools if needed,” Packirisamy said.
African economies
The Banco Nacional de Angola’s monetary policy committee is likely to keep its key interest rate after a 150 basis point cut in January, the strongest since July 2018, said Euriteca Andre, an economist and university lecturer.
Policymakers in Nigeria are expected to extend their longest phase of monetary tightening in more than a decade to curb inflation, which is still near its highest level in 18 years, said Mohamed Abu Basha, head of macroeconomics. economic research at the Egyptian investment bank EFG Hermes. Tariffs have been increased cumulatively by 6 percentage points since May.
Bank Al-Maghrib (Morocco) will raise interest rates for the third consecutive meeting to contain inflation which is at a 30-year high and more than double the 2023 target of 3.9% fueled due to an acute drought and rising input costs.
After raising benchmark rates by a total of 14.5 percentage points since November 2021, economists polled by Bloomberg expect the Bank of Ghana’s MPC to hold.
Kenyan policymakers are likely to raise key interest rates to fight inflation and protect the local currency, which has fallen more than 4% against the dollar since the last meeting in January.
Egypt’s central bank is on the verge of a massive rate hike after inflation accelerated faster than expected and food prices rose at a record pace in the Middle East’s most populous country, fueled by a series of currency devaluations.
Zimbabwe is likely to cut the world’s highest interest rates for a second time this year, said Prosper Chitambara, a Harare-based economist. The recent introduction of mixed consumer pricing, which tracks costs in US and Zimbabwean dollars, rather than just local currencies, means the slowdown in inflation will continue, he said.
Neighboring Mozambique will maintain its benchmark interest rate even if double-digit inflation continues through the end of the first half of 2023, in part due to the devastation caused by Cyclone Freddy, said Gerrit van Rooyen, an economist at Oxford Economics Africa. The MPC’s proactive response to inflation has resulted in the real rate being among the highest in Africa despite the increase.
Farther south, Eswatini and Lesotho, whose currencies are pegged to the South African rand, are likely to match the Reserve Bank’s move.
The island nations of Mauritius and Seychelles are ready to leave their base rates unchanged. Inflation in the Seychelles is close to a three-year low and price growth in Mauritius is slowing after five consecutive rate hikes.
Walking again “could prove trickier amid the instability within the global banking system following the Silicon Valley Bank implosion,” said Bhavik Jugurnath, an independent economist. “I think the MPC would like to wait at least 15 minutes to see how this plays out,” he said.
Read: South Africa has reached a new low – and it could be worse: Reserve Bank