Central banks across Sub-Saharan Africa tightened in 2015 to cope with a strengthening US dollar and the associated upward pressure on import prices.
This year, policy makers in the east are heading the other way. While higher interest rates are adding to the headwinds facing the struggling economies of Angola, Ghana and Nigeria, subsiding inflationary risks have given central banks in Kenya and Uganda room to ease.
This should contribute to continued stronger growth in East Africa relative to West Africa into 2017.
The Bank of Uganda has been an early mover, as anticipated by BI Economics, cutting the policy rate by 100 bps to 16.0% in response to an improved inflation outlook and rising risks to economic growth.
With tax increases adding to drags on demand from lower foreign direct investment, additional rate cuts are likely in June and in the second half of the year. This means that Ugandan growth is likely to slow from the 6.9% estimated for 2015, possibly even below the 5.0% expected by the central bank in the current fiscal year.
In Kenya, there are also indications that the economy has lost some momentum, after the central bank tightened rates abruptly in June and July (see chart above).
Treasury and interbank rates have normalized after spiking in 3Q15, but credit conditions are highly uneven between larger banks, generally the receivers of surplus liquidity in the money market, and smaller institutions, which are less trusted by other players.
This gap in financing costs is likely to have widened, with three small-to-medium sized banks having been taken into receivership since August.
Questions about the solvency of smaller banks, shifting deposits to larger players, could disrupt the credit channel, with repercussions for lending and economic growth.
This adds to the likelihood of a rate cut at the Monetary Policy Committee’s meeting in mid-May, especially if inflation, at 6.5% in March, drops toward or even below 5% in April, as BI Economics expects. Monetary easing should boost economic growth in 2016, possibly even outpacing last year’s 5.6% expansion (International Monetary Fund estimate).
In West Africa, policy makers appear to be converging on tighter monetary policy, in spite of economic growth having slowed markedly to an estimated 3.0% in Angola and 2.7% in Nigeria, compared with 4.8% and 7.0%, respectively, in 2014.
Last year, the two countries had radically different responses to the plunge in oil prices. Angola has allowed its currency to depreciate, slashed government spending and hiked its policy rate to 14% on March 29 from 8.75% in September 2014.
Nigerian authorities have resisted devaluation and aim to increase borrowing to maintain spending levels.
While the central bank raised its benchmark rate by 100 bps to 12% on March 22, that marked a surprising about-face on monetary policy.
A continued acceleration of inflation in March in Angola — to 23.6% year over year from 20.3% — and Nigeria — to 12.8% from 11.4% — is likely to see central banks in both countries tighten policy further in upcoming meetings on April 25 and May 24, respectively.
Ghana Bank Governor to Keep Market Guessing on Rates
The Bank of Ghana’s MPC meeting on May 16 will be the first presided over by new Governor Abdul Nashiru Issahaku, who was previously second deputy governor.
His predecessor, Kofi Wampah, who left office four months early, raised rates sharply during his tenure, starting in 2012. This contributed to growth slowing from an average of 9.8% in 2011-2013 to 3.2% in 2015. Market participants will be keen to see if monetary policy will remain hawkish under Issahaku.
Inflation moderated somewhat in the second half of 2016 as the exchange rate steadied, but then accelerated again to 19.2% year over year in March.
The stability of the cedi will be instrumental for keeping inflation in check in 2016, and BI Economics has previously highlighted the risks from the rapid attrition of Ghana’s foreign-exchange reserves.
The Bank of Ghana is likely to remain on hold in May, keeping observers guessing about Issahaku’s policy leaning.
The widening gap in monetary policy between East and West Africa is likely to add to the expected outperformance of Kenya’s economy, and to a lesser extent that of Uganda, compared with Nigeria and Angola this year, thus contrasting with last year when tightening was more uniform across Africa.
While Ghana should benefit from a planned increase in oil production in the second half of the year, tighter monetary and fiscal policy will damp the expected acceleration in growth.