Africa’s Central Banks To Stay on Hold, Await Stimulus Effects

LAGOS (Capital Markets in Africa) – With emergency stimulus done, for now, central banks across Sub-Saharan Africa (SSA) are likely to hold rates in the coming weeks despite higher inflation. That will allow for the full effects of stimulus measures to take place now that most restrictions have been lifted. The pause reflects their desire to strike a balance between maintaining price stability, reducing exchange-rate pressures, and stimulating the domestic economy.

Central banks will continue to monitor domestic developments, with the focus shifting back to inflation as food shortages and currency weakness have pushed headline numbers above target. However, muted inflation pressures in South Africa will likely create space for further monetary policy easing. While monetary policy is expected to remain accommodative, it won’t be enough to spur a robust recovery.

African central banks were quick to respond to the pandemic. With fiscal policy largely constrained, the burden of support has mostly fallen on monetary policy. Most central banks responded within the policy space they had, with South Africa, Zambia, and the BCEAO cutting rates further since July.

The emergency tools deployed include reducing capital requirements, relaxing various monetary and prudential policies and introducing new facilities to inject liquidity to the banking sector, allowing loan deferrals and restructuring for distressed firms and households, and waving mobile-money and e-payment charges to limit the use of cash whilst still aiding economic activity. Interest rates were also cut, but more aggressively in countries with policy space such as South Africa.

Africa’s Major Central Banks Are Likely to Keep Rates on Hold
We think major central banks in sub-Saharan Africa are likely to hold rates at their next meetings as headline inflation remains above target as a result of higher food prices and currency weakening. However, in South Africa, we see space for a further 25bps interest rate cut as both GDP and inflation outcomes have undershot the SARB’s expectations — inflation expectations also remain firmly anchored.

Looking ahead, we expect Angola to hold rates through 2020 as it tries to bring inflation within single-digits. Still-elevated food inflation will likely stay the Bank of Ghana’s hand for the rest of the year. The same is true in Nigeria, where inflation remains stubbornly above target. Although South Africa and Kenya will still have space to cut rates, they too are likely to signal a pause in the current easing cycle.

Angola’s Central Bank Has Limited Policy Space to Maneuver
Angolan inflation inched up to 22.2% in July from 18% at the beginning of the year. It remains on an upward trajectory, limiting the space available to maneuver. In keeping with its goal of single-digit inflation, the bank maintained the policy rate at 15.5% but introduced measures to ease credit and lending conditions.

The central bank has provided over 370 USD million in liquidity support to the banking sector by reducing the rate on its seven-day permanent liquidity absorption facility, reinstating its permanent overnight liquidity provision facility, establishing a special liquidity facility, and allowing banks to deduct from reserves the amount of credit extended to targeted sectors. The central bank also urged banks to implement further measures to extend relief to consumers and support credit extension.

Banco Nacional de Angola will continue to hold rates in line with its commitment to control inflation. At 22.2% in July, headline inflation remained well above the central bank’s single-digit inflation target. This trend is likely to stay, as food and non-alcoholic beverages prices continue to exert the most pressure on prices in the economy, with a contribution of 61.74%. The recent rating’s downgrades will weaken the exchange rate further, adding to the inflationary pressures.

Although the bank has no room to cut rates, it will likely continue to support the economy by maintaining the rate on the overnight deposit facility at 0%, rolling over its overnight lending facility for another three months with a fresh stimulus of 100 billion Kwaza, and broadening access to the public securities discount facility.

Bank of Ghana’s Pandemic Stimulus Was Extensive
The Bank of Ghana cut the policy rate by 150bps to 14.5% and announced several measures to mitigate the impact of the pandemic, including lowering the primary reserve requirement from 10 to 8%, lowering the capital conservation buffer from 3 to 1.5%, revising provisioning and classification rules for specific loan categories, and lowering the cost of mobile payments.

At its May 15 meeting, the MPC kept the policy rate unchanged and announced a new bond purchasing program to provide emergency financing to the government in light of a higher projected fiscal financing gap. The bank also announced relief measures for small depository institutions and a US$1 billion repo agreement with the U.S. Federal Reserve under its FIMA facility. The committee will take additional measures if necessary.

Ghana’s headline inflation surged to 11% in the second quarter due to higher food prices and rising inflation expectations. This has disrupted the projected disinflation path, with the Bank of Ghana now expecting inflation to return to target by 2Q 2021, instead of the end of the year because of the upward trend in inflation expectations.

The risks to the outlook remain elevated. Food contributes over 50% to the CPI basket. The government’s stimulus package is stoking inflation and will do so until the country returns to its fiscal consolidation path. Inflation expectations could also rise further due to uncertainty related to the upcoming December election. Even so, we expect the bank to look past these pandemic induced risks and continue to hold rates while keeping a close eye on domestic price developments.

Kenya Has Cut Rates, Extended Emergency Measures Amid Covid-19
The Central Bank of Kenya reduced rates by 125bps in response to COVID-19 and introduced measures to boost bank liquidity and encourage credit extension and spending. It lowered the bank cash reserve ratio by 100 bps to 4.25%, increasing the tenor of repo agreements, and increased bank flexibility regarding loan classification. On the consumer side, it encouraged more flexible loan terms and the reduction of charges on mobile money transactions. It reinforced these measures with temporary regulations that protect consumers against negative credit listings.

The cumulative emergency measures are estimated at 745 billion Kenya shillings (6.96 billion USD) or 7% of GDP. By the end of June, 87% of the funds released to the banking sector through the reduction of the cash reserve ratio had been used to support lending.

The central bank of Kenya held rates for the third consecutive time at its last meeting in July despite moderation in headline inflation. This reflects the monetary policy committee’s view that the current policy stance remains appropriate given the package of measures it implemented since March was having the intended effect on the economy. We, therefore, expect them to continue to hold rates at 7% for the rest of the year

Sentiment has improved in line with incoming data that point to continued strong performance in the agriculture sector. Exports also continue to post a strong rebound, in line with the lifting of restrictions in key markets. However, demand in tourism and related services sectors remain weak. Inflation also remains well anchored and is expected to stay within the target range in the near term.

Nigeria Mixes Rate Cut With Capital Controls to Stem FX Decline
The Central Bank of Nigeria in May reduced the policy rate by 100bps to 12.5%. The cut adds to credit and liquidity easing measures the CBN has already announced to cushion the economy and the pre-virus increase in the minimum loan to deposit ratio. Policymakers now think the economy can avoid a deep contraction because of this combination.

However, this is unlikely as exchange rate shortages and above-target inflation continue to cripple the economy. Declining reserves amid plunging oil prices forced the CBN to devalue the naira by 15% in March and again by 5% in July. To slow the erosion of reserves, the CBN continues to tighten capital controls. It recently cut FX access for corn imports. It also increased the Cash Reserve Ratio earlier in the year to reign in the rising inflation trend and support reserve accretion.

Nigeria Central Bank To Hold Rates Despite Rising Inflation
To balance price stability and growth, the CBN has managed to loosen the main policy rate, the loan to deposit ratio, create a targeted credit facility, and undertake other measures to inject liquidity into the banking system. While this has helped to accelerate credit extension to targeted sectors, it has come at the cost of acute exchange rate shortages and tight capital restrictions that hinder overall economic activity. They also continue to stoke inflation, which remains above target.

The CBN in July held the main policy rate at 15.5% to allow for stimulus measures to take their full effect. We expect it to hold for the rest of the year in line with its pro-growth policy bias. But the net effect of its actions (FX restrictions, high cash reserve ratio, and ongoing market operations) will continue to drain liquidity.

South African Reserve Bank Has Lowered Rates To A Record Low
South Africa’s central bank cut rates by 275 bps since March, taking the repo rate to a record low of 3.5%. It announced several measures to ease liquidity and encourage lending, and relaxed banking sector capital requirements. The cumulative support is estimated at R300bn ($16bn or 5.5% of GDP).

The SARB continues to buy government bonds in the secondary market to improve market functioning but has slowed down the pace of purchases. To date, the bank has purchased additional bonds worth 30 billion rand — an increase in its bond portfolio of about 0.6% of GDP from pre-crisis levels. This is comparable to purchases by emerging market peers. The SARB has indicated that these purchases will continue to counter market stress — but will remain small.

Source: Bloomberg Business News