East African central banks raise interest rates on inflationary pressure

Saturday April 13 2024
The Central Bank of Kenya in Nairobi.

The Central Bank of Kenya headquarters in Nairobi, Kenya. PHOTO | NMG


East African central banks are keen on anchoring inflation expectations to reduce the cost of living and attempt to comply with the elusive macroeconomic convergence conditions for a single currency regime.

These include a debt-to-gross domestic product (GDP) ratio of 50 percent, fiscal deficit (including grants) of three percent of the GDP, overall inflation of eight percent and forex reserves of 4.5 months of import cover.

Worries over inflation and depreciation of local currencies have been at the centre-stage of influencing monetary policy decisions among regional central banks.

Continued attacks in the Red Sea — through which 11 percent of global trade flows—and the on-going war in Ukraine provide new inflationary threats, with the risk of generating fresh adverse supply shocks to the global economic recovery.

The EA member states missed the initial deadline of implementing a monetary union that was 2024 and instead set new timelines of 2031.

Read: Africa economic growth fell to 3.2pc in 2023


The Bank of South Sudan (BoSS) in January 2023 set its policy rate for the year 2023 at 12 percent to rein in inflation and stem the persistent depreciation of the South Sudanese Pound (SSP) against the US dollar that had led to the creation of a parallel foreign exchange market.

Later in March, the bank’s monetary policy committee increased the key interest rate by 300 basis points to 15 percent from 12 percent to help achieve and maintain price stability to support the government’s plan of consolidating a lasting peace and attaining macroeconomic stability in Juba.

This year, BoSS Governor James Alic Garang maintained the central bank rate (CBR) at 15 percent.

“Going forward, the Bank of South Sudan will endeavour to work closely with the fiscal authorities to ensure that fiscal and monetary policies are well co-ordinated to promote overall wellbeing of South Sudanese,” Dr Garang said.

Emmanuel Tutuba, the Governor of the Bank of Tanzania (BoT) and the members of his monetary policy committee, raised interest rate to six percent from 5.5 percent on April 3.

Mr Tutuba said increasing interest rate was necessary to stem the lingering inflationary pressures arising from global economic developments.

The Bank of Uganda (BoU) last month convened an emergency monetary policy committee (MPC) meeting that increased its policy rate by 50 basis points to 10 percent to deal with the new inflationary threats.

Read: Uganda raises key rate to 10pc as shilling weakens

And on April 8, the BoU further increased its Central Bank Rate to 10.25 percent from 10 percent in March.

“The weakening of the shilling significantly impacts domestic prices which could push inflation higher. The evolution of inflation remains challenging, influenced by factors such as the shilling exchange rate, supply side shocks, global inflation, and domestic food supply,” the bank’s deputy governor Michael Atingi-Ego said.

The National Bank of Rwanda (NBR) whose key interest rate stands at 7.5 percent is expected to review its policy stance in May, but it has warned that several potential risks, including the Red Sea crisis could affect the inflation outlook. Last year, NBR continued the monetary policy tightening cycle to curb inflationary pain.

The bank increased the policy rate by 100 basis points to reach 7.5 percent, resulting in a cumulative increase of 300 basis points since February 2022.

In Kenya, the central bank held its policy rate steady at 13 percent during its latest monetary policy committee meeting on April 3 after a 50-basis point increase in the policy rate to 13 percent from 12.5 percent in February, the largest rate hike in 12 years.

“A key risk to inflation is international oil prices, which have trended upwards since January 2024 largely driven by disruptions to shipping through the Red Sea, and production cuts by Opec+ and other allied oil producers,” said Kamau Thugge, the governor of the Central Bank of Kenya.