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Eyes on EA central banks as major continent economies hike lending rates

By on May 28, 2022 0


East Africans are watching their central banks as inflationary pressures push major economies across the continent and even the world to raise lending rates.

Nigeria, South Africa, Egypt and Ghana have recently raised central bank rates citing the need to promote macroeconomic stability.

Loan rate

It comes barely a month after the United States raised its key rate from 0.5% to 1% – the highest in more than 20 years – also citing the need to combat rising commodity prices.

The United Kingdom, India, United Arab Emirates, Mexico, Canada, Australia and New Zealand are other developed economies that have raised interest rates in the past month due to rising raw material prices.

But Tatonga Rusike, economist for sub-Saharan Africa at Bank of America, told Bloomberg that some African economies like Zambia and Kenya are likely to leave their benchmark interest rates unchanged as inflation rates in those countries show signs of slowing down.


American effect

Kenyan economist Kwame Owino said this week East Africa that Kenya can keep its central bank interest rate at seven percent on May 30 when the Central Bank‘s Monetary Policy Committee sits.

Experts say the higher central bank rate in the United States will certainly impact African economies, which are already struggling with inflation, currency depreciation and rising debt burdens.

Mr Owino, CEO of the Kenya Institute of Economic Affairs, said debt service would prove more costly for countries that have dollar-denominated loans.

“The US dollar is expected to appreciate against other currencies, which will make imports to countries in the region more expensive,” Owino said.

The four major African countries that have raised interest rates have recently cited inflationary pressures, raising the question: what will East Africa’s central banks do differently as these challenges sweep the world?

Central bank interest rates have remained stable in the region over time, but some economists now argue that upward revisions may be inevitable given the global monetary environment and ongoing economic shocks; otherwise, they would suffer a recession or massive capital flight.

The National Bank of Rwanda raised its interest rate to 5% in February, but kept it at the last monetary policy review on May 12. She should see him again in August.

Lily: Rwanda’s central bank maintains lending rate to contain inflation

The Bank of Uganda is expected to review its interest rate on June 16, after keeping it at 6.5% when last reviewed on April 12, after lowering it by 7% in December 2021.

The Bank of Tanzania also kept its rate at 5% when last reviewed in March. The rate has been stable since mid-2020 but should be reviewed soon.

In Kenya, the monetary review board on March 29 kept the CBR at seven percent, a rate that has been steady since 2020.

Dominant uncertainty

History shows that East African countries are more likely to lower their interest rates than to raise them, but given the current economic conditions, it is not certain that this trend will continue.

According to Mr. Owino, it is economically more viable for central banks in the region to maintain or lower rather than increase their interest rates because the economic environment in the region is “different”.

“Rising interest rates will have a negligible effect on inflation rates because, unlike the United States, rising commodity prices in the region are mainly driven by external shocks that lead to currency depreciation. “, said Owino.

“The United States is simply trying to reverse the effects of releasing too much money into the economy during the time of the Covid-19 pandemic, which partly caused their inflation.

“Nigeria and Ghana are also net oil and food exporters, and their rising inflation is negligible due to external shocks.”

If East African central banks raise their interest rates, it will discourage commercial banks from lending to individuals and businesses, making the cost of borrowing higher.

“Across the region, central bank rates are already too high. Raising it will make it too expensive to borrow,” Owino said.