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Congo raises key rate to 7% to check inflation

Sep 29 2016 11:12
Tom Wilson

Kinshasa - The Democratic Republic of Congo raised its key interest rate by 5 percentage points to 7%, citing accelerating inflation and "tensions in the foreign-exchange market," Governor Deogratias Mutombo Mwana Nyembo said.

The increase marks the first change in the base rate in almost three years and comes after the government’s foreign-exchange reserves dropped below $1bn for the first time since 2008.

Reserves have fallen by a third since the start of year as a sustained drop in prices for copper, oil and other key exports reduced government revenue, forcing the authorities to use reserves to support spending and protect the franc.

Inflation accelerated to 2.99% in September from 2.26% in August, while foreign-exchange holdings declined to $996 million, enough to cover 4.4 months of imports, from $1.5bn at the end of last year, according to a statement handed out to reporters in the capital, Kinshasa.

"The rate hike is unlikely to make much of a difference, but the central bank did not have many alternative ways to bolster the currency as foreign-exchange reserves are at rock bottom," Mark Bohlund, an economist with Bloomberg Intelligence in London, said by e-mail.

"The central bank may not have much alternative than letting the franc depreciate, at least until copper production picks up again, which now looks more likely to be weighted towards the second half of next year."

Congo lowered its growth estimate for this year to 4.3%, citing lower commodity prices. It is Africa’s biggest copper producer and the world’s largest source of cobalt.

The central African nation depends on mining, oil and gas revenue for 22% of gross domestic product and 95% of export earnings, which have been curbed by the fall in prices.

Copper output dropped 14% in the first half, as cobalt production fell 13%.

Despite intervention by the central bank to protect the value of the currency by selling dollars into the market on several occasions, the franc has declined 12% since the start of the year to 1 040 per dollar, according to central bank data.

On the parallel market, the currency has depreciated to an average of 1 137 per dollar.

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