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Johannesburg - Central banks at three corners of Africa have a last chance in coming days to prepare their economies for any liftoff in US interest rates as they grapple with policy already complicated by record-low currencies.
Ghana unexpectedly increased its benchmark interest rate on Monday, while South Africa and Kenya will each set monetary policy this week against a backdrop of heightened speculation that the Federal Reserve will raise borrowing costs for the first time in nine years in December.
In Nigeria, Africa’s largest economy, the central bank will hold its final meeting of the year on Tuesday next week.
Policy unchanged
From Ghana to Zambia, African currencies have been among the worst hit by a slide in investor sentiment toward emerging and frontier markets as the Fed prepares to remove stimulus. That has spurred policy makers across the continent to tighten monetary policy to ward off inflationary threats, bucking a global trend of low rates and enabling them now to keep policy unchanged in anticipation of the Fed’s move.
“There is a lot of uncertainty in the market about what will happen if the Fed eventually decides to hike rates,” Thea Fourie, an economist for sub-Saharan Africa at global risk adviser IHS Inc., said from Pretoria.
“Some may be forced to hike rates further. No one knows how much more exchange rates can weaken.”
The Bank of Ghana increased its benchmark rate by 1 percentage point to 26% on Monday, a move predicted by only two of the nine economists surveyed by Bloomberg.
Riskier assets
Analysts are split on whether the South African Reserve Bank will follow suit, with 10 of the 26 economists surveyed by Bloomberg predicting the repurchase rate will be raised by 25 basis points to 6.25% on November 19.
The Central Bank of Kenya is set to leave its rate at 11.5% on Tuesday, according to the majority of economists surveyed by Bloomberg.
The prospect of higher US interest rates is driving investors away from riskier assets at the same time that a slowdown in China fuels a slump in copper, gold and other metals that count as the main source of revenue in many African nations. Ghana’s cedi has plunged 16% against the dollar this year, the rand is down 20% and Kenya’s shilling has dropped 11%.
“If you look at what’s been happening with the exchange rates of most African countries this year, it’s a major problem and if the Fed does decide to raise, the possibility of further weakness in their currencies is very real,” said Lullu Krugel, an economist at KPMG.
“The imported inflation this can bring about is also a risk.”
Tighten policy now
In South Africa, where the rand fell to a new low of 14.4285 against the dollar last week, the central bank has raised the benchmark interest rate by 100 basis points since the beginning of last year. The currency weakened less than 0.1% to 14.3970 per dollar as of 12:11GMT in Johannesburg on Monday.
Governor Lesetja Kganyago has taken a gradual approach to raising interest rates in the face of a slowing economy. Inflation is set to exceed the entral bank’s 3% to 6% target band in the first and last quarters of next year, compared to 4.6% in September.
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“The Reserve Bank is forward-looking and their concern is going to be centered around inflation expectations,” said Razia Khan, chief Africa economist at Standard Chartered Plc, in London.
“There is a case for them to tighten and on balance we think they would do better for the credibility of policy to tighten now rather than to wait until they’ve maybe seen worse inflation outcomes.”
Investors have increased bets on higher borrowing costs in South Africa this month, with forward-rate agreements starting in one month, used to speculate on interest rates in the period, pricing in 16 basis points of increases, up from zero on October 16.
Rein in spending
In Ghana, the central bank has been struggling to contain a fallout from a weaker currency, declining reserves and inflation in excess of 17%. Authorities in the West African nation were forced to turn to the International Monetary Fund for loans of almost $1bn this year, while Finance Minister Seth Terkper has pledged to rein in spending to curb debt.
Kenya’s central bank increased its policy rate by 3 percentage points in June and July. Governor Patrick Njoroge said last week higher interest rates have helped to bring inflation expectations under control. Consumer prices rose 6.7% in October from a year ago, down from 7.1% in April.
“African central banks will have to wait for the Fed to increase rates and see the impact before acting on that,” said Robert Bunyi, managing director of investment company Mavuno Capital in Nairobi.
