Inflationary pressures and currency weakness could force central banks in some key African economies to tighten monetary policy, even as the slow rollout of coronavirus vaccines and new mutations of the disease pose risks to economic growth.
Specifically, Nigeria is most likely to raise benchmark interest rate this year giving inflation all pressures and continued weakness of the local currency, Naira.
Beside Nigeria, Angola, South Africa are equally facing inflationary pressures
- Mozambique and Zambia became the first two countries in the world to raise their benchmark interest rates this year, and three of sub-Saharan Africa’s biggest economies — Nigeria, South Africa and Angola are likely to follow suit, reports Bloomberg.Policy Tightening
Two African central banks have increased borrowing costs this year. 8
“We expect more African central banks will come under pressure to tighten monetary policy, due to persistent inflationary pressures,” said Ayomide Mejabi, chief economist for sub-Saharan Africa at JPMorgan Chase Bank NA.
The Zambian central bank could announce another 150 basis points of hikes this year and the Central Bank of Nigeria is expected to tighten by at least a 100 basis points in response to rising inflation, he said.
What Bloomberg Economics Says:
“Angola and Nigeria face the most immediate pressure to act. The rest still have space to keep rates on hold until next year. The risk is that they ease further on growth concerns before the hiking cycle begins”
While Nigeria’s economy dropped into a recession for the second time in four years, surging inflation and weak liquidity in the foreign-exchange market may prompt the central bank to act soon. A slow recovery starting in the second quarter could push the monetary policy committee to “redirect its policy goals from growth, toward its primary mandates of price and exchange-rate stability,” according to analysts with Chapel Hill Denham. The Lagos-based investment bank sees the panel raising its benchmark rate to 12.5% from 11.5% this year.
According to Bismarck Rewane, one of Nigeria’s foremost economists, CBN’s tightening of its monetary stance may be the last card in its armoury as it shifts its focus back to price stability. In the current FDC Bi-monthly Economic and Business Update for February 11, 2021, where the economist and his think tank forecasted rightly spiraling of inflation in January on the back of insecurity and forex restrictions to food imports, they said that “The rise in interest rates will increase the real rate of return and drastically reduce capital outflows while tapering inflationary pressures.”South Africa
In South Africa, rising electricity and oil prices are fueling inflation expectations and driving up bets the central bank will raise its key rate this year. Forward-rate agreements, used to speculate borrowing costs, are now pricing in 42 basis points of tightening in 2021, a turnaround from the beginning of the month when expectations were for the repurchase rate to remain unchanged at a record low 3.5%. Any upward move by South Africa could be emulated by neighboring Lesotho, Eswatini and Namibia, which peg their currencies to the rand.
Angola’s central bank, which didn’t cut its policy rate in response to the virus in 2020, also faces pressure to hike due to rampant inflation. Price growth in Africa’s second-biggest oil producer jumped to 25.3% in January. Budget documents show the government sees inflation only slowing to 18.7% by the end of the year and that could force the central bank to act as the kwanza continues to weaken and the gradual implementation of a new 14% value-added tax pushes up prices.
MPCs in Nigeria, South Africa and Angola are due to meet and vote on interest rates in late March.