Johannesburg - Africa’s major economies are taking diverging approaches to monetary policy as they struggle to cope with volatile currencies, slumping growth and political meddling.
Ghana, Kenya, Nigeria and South Africa are set to announce interest-rate decisions this week in an environment marked by accelerating price growth and an economic slump in some countries and attempts by politicians to prescribe policy in others. While Nigeria’s central bank will probably take more aggressive action, South Africa, Kenya and Ghana are set to keep rates on hold, according to analysts surveyed by Bloomberg.
The contrasting approaches underscore the difficult policy choices facing African central banks as a slump in commodity prices and sluggish global demand continue to weigh on raw material exporters, like South Africa and Nigeria, the continent’s two largest economies. Political pressure is also mounting as Ghana and Kenya prepare for elections in the next 12 months and infighting in South Africa’s government and ruling party escalates.
“Internal dynamics, I think, will influence the monetary policy direction more so than what’s happening externally,” Yvonne Mhango, a sub-Saharan Africa economist at Renaissance Capital in Johannesburg, said by phone. “Currency movements will be significant.”
Under normal circumstances the timing and direction of the US Federal Reserve’s policy decisions would weigh heavily on the decision-making of central banks in countries dependent on foreign capital inflows and imports. Domestic factors could, however, play a greater role this week.
While inflation in Ghana, the world’s second biggest cocoa producer, quickened to 16.9 percent in August, the rate has come down from the 19.2 percent record in March. The pledge by the government of President John Dramani Mahama, who will contest for a second term in office in a December vote, to increase public-sector salaries by 12.5 percent from January is likely to make the Bank of Ghana hesitant about monetary easing, Mark Bohlund, an economist at Bloomberg Intelligence in London, said in a note. Four of the six economists in a Bloomberg survey said borrowing costs will stay on hold on Monday.
“Despite the somewhat higher inflation print for August, we expect an unchanged policy stance as inflation is on a downward trajectory,” Ridle Markus, an Africa strategist at Barclays’ unit in Johannesburg, said in an emailed response to questions. “The relative stability in the exchange rate may be welcomed by the MPC though it will still be concerned about the impact a US rate hike may have on the cedi.”
Politics could weigh on the Kenyan central bank’s decision-making on Tuesday even as the shilling has been relatively stable against the dollar this year, helping to keep inflation inside the bank’s 2.5 percent to 7.5 percent target band. President Uhuru Kenyatta, who will run for a second term in August elections, has signed a law capping commercial lending rates.
The new law is a “complicating factor”, Gareth Brickman , a market analyst at ETM Analytics in Stamford, Connecticut, said in an e-mailed response to questions. It “will naturally give the CBK reason to pause before acting on policy”.
While the South African Reserve Bank’s independence is enshrined in the nation’s constitution, senior ANC politicians recently suggested the regulator should help support the rand and that its authority to issue banking licences must be revoked. Political turmoil, including reports that Finance Minister Pravin Gordhan may be arrested and infighting in the ruling party, has led to a renewed slump the nation’s bonds and currency, which the central bank says is a key risk to the outlook for price growth.
The Monetary Policy Committee has raised its benchmark repurchase rate by 125 basis points to 7 percent since last July and kept it unchanged at its past two meetings to support an economy forecast to expand at the slowest pace since a 2009 recession this year. While inflation slowed to 6 percent in July, the bank forecast it will only fall back into the 3 percent to 6 percent target range in the third quarter of next year. All 15 economists surveyed by Bloomberg expect the MPC to keep rates unchanged on September 22.
“Growth dynamics are still very weak and inflation has improved quite significantly,” Mamello Matikinca, an economist at First National Bank, said by phone from Johannesburg. “Based on that it gives them enough justification to pause.”
Nigeria’s Governor Godwin Emefiele, who will announce the central bank’s decision on Tuesday, increased borrowing costs by 200 basis points to 14 percent in July to attract foreign investment and help prop up a currency that’s lost almost 40 percent against the dollar since the removal of a 197-199 per dollar peg in June. The lagged effects of the peg and the weak naira contributed to inflation accelerating to the highest rate in almost 11 years last month while the economy contracted year-on-year for second consecutive quarter in the three months through June.
“Nigeria’s central bank is in a tough place. Growth dynamics in the economy are at multi-decade lows,” Raza Agha, chief economist for Middle East and Africa at VTB Capital in London, said in an emailed response to questions. With the naira still under pressure “we expect the central bank to raise rates.”
* With assistance from Simbarashe Gumbo, Ekow Dontoh and Gordon BellBloomberg