East African central banks are taking varying interest rate positions to protect fragile economies battered by inflation, depreciating currencies and global supply disruptions, signalling the likely end to a synchronised monetary policy regime, which banking regulators worldwide have lately been using to control the rising prices of goods and services.
This week, Central Bank of Kenya (CBK) surprised the market with a 50-basis-point increase in the policy rate to 13 percent, from 12.5 percent, the largest rate hike in 12 years, setting the stage for more expensive loans.
“The proposed action will ensure that inflationary expectations remain anchored, while setting inflation on a firm downward path towards the five percent mid-point of the target range, as well as addressing residual pressures on the exchange rate,” said Dr Kamau Thugge, CBK Governor and chairman of the Monetary Policy Committee (MPC).
A market report by economists at Oxford Economics Africa shows that the past two weeks have delivered several surprising monetary policy decisions across Africa.
Kenya and Malawi are the latest countries to surprise the markets with policy tightening, with price inflation and currency weakness remaining concerns in both countries.
This follows an unexpected policy rate hike by Egypt and surprising dovish pivots by Ghana and Mozambique.
“It is now also clear that Pan-African monetary policy synchronisation is over,” the economists said.
Kenya’s overall inflation increased to 6.9 percent in January, from 6.6 percent in December 2023, with fuel inflation rising to 14.3 percent, from 13.7 percent in the same period.
According to the CBK, the ratio of gross non-performing loans (NPLs) to gross loans had declined marginally to 14.8 percent in December 2023, from 15.3 percent in October 2023, with banks continuing to make adequate provisions for the bad loans.
Kenya’s economy is estimated to have grown by 5.6 percent in 2023, compared with 4.8 percent in 2022, with hopes of improved performance in 2024, supported by services and agriculture sectors.
In Uganda, the MPC on February 6 maintained the policy rate at 9.5 percent as both headline and core inflation rose in January to 2.8 percent and 2.4 percent respectively, from 2.6 percent and 2.3 percent in December 2023.
“The inflation forecasts have been revised up slightly in the short term (12-month horizon) in light of the relatively stronger exchange rate depreciation in the recent past but are projected to remain below the medium-term target of 5 percent,” said Michael Atingi-Ego, Bank of Uganda Deputy Governor.
Easing in global pressures
Uganda’s inflation is projected to stay around three percent through the first half of 2024, largely reflecting stable demand conditions and the easing in global pressures, which are expected to continue to flow through to domestic prices over time.
Its core inflation is projected to rise to between 4.5 percent and five percent in the 2024/2025 fiscal year and remain around five percent in the medium term.
“Risks to the inflation outlook remain highly subject to changes in global commodity prices and global financial markets developments. Instability in the Middle East is creating new supply chain n disruptions and the threat of higher oil prices,” Mr Atingi-Ego said.
“In addition, the risk of heightened volatility in the global financial and foreign exchange markets remains which could reverberate in the domestic foreign exchange market.”
The Bank of Tanzania (BoT) in January set its main interest rate at 5.5 percent after adopting an interest-rate based monetary policy framework in a bid to contain inflation within its target and boost economic growth.
The BoT Monetary Policy Committee met on January 18, the first-ever meeting in which the banking regulator began implementing monetary policy using interest rates.
“This forward-looking framework is expected to improve the effectiveness of monetary policy in the changing economic environment,” BoT said in a statement.
“The MPC’s decision on the CBR rate considered the need to contain inflation within the medium-term target of five percent, while supporting economic growth to reach 5.5 percent or more in 2024 and ensuring the stability of the exchange rate.”
The National Bank of Rwanda MPC met on November 22, 2023 and decided to maintain the Central Bank Rate at 7.5 percent to tame inflation and shore up the economy. The next review is expected this month.