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 and Mozambique raised its rate for a second consecutive month on Monday against a backdrop of heightened speculation that the Federal Reserve will lift borrowing costs for the first time in nine years in December. South Africa and Kenya will each set monetary policy this week, while in Nigeria, Africa’s largest economy, the central bank will hold its final meeting of the year next Tuesday.
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’s 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, said by phone from South Africa’s capital, 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 percent on Monday, a move predicted by only two of the nine economists surveyed by Bloomberg. Mozambique’s central bank raised its policy rate by 50 basis points to 8.25 percent.
The Central Bank of Kenya is set to leave its rate at 11.5 percent on Tuesday, according to the majority of economists surveyed by Bloomberg. 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 percent on November 19.
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 percent against the dollar this year, South Africa’s rand is down 20 percent and Kenya’s shilling has dropped 11 percent.
“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,” Lullu Krugel, an economist at KPMG, said by phone from Johannesburg. “The imported inflation this can bring about is also a risk.”
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 rose 0.2 percent to 14.3603 per dollar as of 5:46 p.m. 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 central bank’s 3 percent to 6 percent target band in the first and last quarters of next year, compared with 4.6 percent in September.
“The Reserve Bank is forward-looking and their concern is going to be centred around inflation expectations,” Razia Khan, chief Africa economist at Standard Chartered, said by phone from 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.
In Ghana, the central bank has been struggling to contain a fallout from a weaker currency, declining reserves and inflation in excess of 17 percent. Authorities in the West African nation were forced to turn to the International Monetary Fund for loans of almost $1 billion this year, while Finance Minister Seth Terkper has pledged to rein in spending to curb debt.
“Not only the Fed but all developments in domestic and foreign markets, the tightening financial conditions, China and other emerging markets are considered before arriving at the decision,” Ghana’s central bank Governor Kofi Wampah told reporters on Monday.
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 percent in October from a year ago, down from 7.1 percent in April.
“African central banks will have to wait for the Fed to increase rates and see the impact before acting on that,” Robert Bunyi, managing director of investment company Mavuno Capital, said by phone from the Kenyan capital, Nairobi.