African giants may hold rates

Lesetja Kganyago, the governor of the South Africa’s Reserve Bank, speaks during a Bloomberg Television interview at the World Economic Forum.Photo: Bloomberg

Lesetja Kganyago, the governor of the South Africa’s Reserve Bank, speaks during a Bloomberg Television interview at the World Economic Forum.Photo: Bloomberg

Published Jan 24, 2017

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Abuja - The central banks of Africa’s two largest

economies will probably leave borrowing costs unchanged on Tuesday after

Nigeria’s economy is expected to have contracted in 2016 and South Africa looks

set to have had the slowest growth since 2009.

South Africa’s Reserve Bank, led by Governor Lesetja

Kganyago, may leave the benchmark repurchase rate at 7 percent for a fifth

straight meeting, according to all 20 economists surveyed by Bloomberg. All 16

economists in a separate Bloomberg survey said that the Monetary Policy

Committee at the Central Bank of Nigeria, headed by Governor Godwin Emefiele,

will leave rates at a record of 14 percent for a third consecutive meeting when

it announces its decision.

Setting interest rates in both nations was complicated

for most of 2016 by above-target inflation and poor economic performance. Low

metal prices, weak global demand and a drought probably cut expansion in South

Africa to the lowest since a 2009 recession, according to government estimates.

The Nigerian economy may have shrunk by 1.5 percent because of low oil prices

and a fall in production, according to the International Monetary Fund. This

would be the first full-year contraction in more than two decades as government

revenue was cut by half.

“We think they will hold rates,” John Ashbourne, an

economist at Capital Economics in London, said by phone on Monday. “In

both cases growth is low and inflation is higher than policy makers would like.

But while it’s prices of petrol and food that are driving up inflation in South

Africa, in Nigeria, it’s a weak currency."

Read also:  Inflation quickens to 6.8%

South Africa’s inflation quickened to a 10-month high of

6.8 percent in December as the cost of food surged. Price growth and the

uncertainty of how US President Donald Trump’s policies will affect capital

flows into emerging markets will be talking points at the nation’s MPC meeting,

according to Jeffrey Schultz, a senior economist at BNP Paribas Securities in

Johannesburg.

Inflation expectations

“Inflation expectations have been hovering close to 6

percent for quite some time now and they are going to want to see these numbers

moderate quite significantly back toward that 5 percent level over the coming

quarters to warrant any change in their view,” Schultz said by phone.

The MPC after its November meeting indicated that whereas

it may be nearing the end of a tightening cycle, the inflation trajectory was

uncomfortably close to the upper end of the 3 percent to 6 percent target

range, and that could call for reassessing monetary policy. Food costs, higher

oil prices and the value of the rand are risks to the outlook, Kganyago said in

a Jan. 17 interview. The South African currency strengthened 0.4 percent to

13.44 against the dollar as of 7:39 a.m. on Tuesday.

According to IMF forecasts the economies of both South

Africa and Nigeria may expand 0.8 percent this year.

The Nigerian naira lost about one third of its value

against the dollar after authorities removed a currency peg in June to allow

the foreign-exchange rate to be market-determined. The central bank continued

to block the purchase of dollars from the inter-bank market for the

imports of 41 items it deems non-essential, which forced importers to buy

dollars at rates about 30 percent more expensive on the black market, and

caused inflation to accelerate to an 11-year high 18.6 percent in December.

Read also:  How South Africans are dealing with inflation

“We expect that inflation probably has peaked,” Ashbourne

said. “The naira will have to be weakened further this year, but the fall is

unlikely to be as strong as the one seen in 2016.”

Vice President Yemi Osinbajo said at the World Economic

Forum in Davos last week that the disparity between the official and

parallel exchange rates is concerning, and authorities are considering further

adjustment to the foreign-currency policy to close the gap. While Finance

Minister Kemi Adeosun has for months called on the central bank to reduce rates

in order to support growth, Emefiele has insisted monetary policy alone can’t

increase economic growth without measures such as boosting industrial output.

“Since the committee feels that its own ammunition is

practically exhausted, we do not see a change in the policy rate until the

expected marked decline in inflation,” Lagos-based investment bank

FBNQuest said in an e-mailed note by authors including Gregory Kronsten,

Olubunmi Asaolu and Chinwe Egwim.

BLOOMBERG

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