Photographer: Waldo Swiegers/Bloomberg

Africa Currency Crises Spark Diverging Central Bank Action

  • Nigeria to stick with looser policy, South Africa tightens
  • Inflation risks rising, while economic growth outlooks worsen

Africa’s biggest economies are taking opposite approaches on monetary policy as they struggle to cope with collapsing commodity prices and a slump in investor confidence.

South Africa, Nigeria, Angola and Ghana are set to announce their first interest-rate decisions of the year this week in an environment complicated by plummeting currencies, rising inflation risks and deteriorating growth. While a record-low rand may force South African policy makers to take more aggressive action, Nigeria is set to stick to its looser policy, according to analysts surveyed by Bloomberg.

The contrasting approaches underscore the difficult policy choices African central banks are being forced to take as their currencies suffer the worst of the rout in global financial markets. In Nigeria, the continent’s biggest economy, growth concerns and naira stability have trumped inflation risks, while fiscal pressures in Ghana and an oil-triggered crisis in Angola have fueled weaker currencies and prompted higher interest rates.

“A further decline in commodity prices, tightening of monetary policy by the U.S. Federal Reserve, and unfavorable weather conditions mean that the short-term outlook for African currencies is weak,” Jacques Verreynne, an economist at NKC African Economics, based in Paarl, near Cape Town, said in an e-mailed response to questions.

“Although the outlook for economic growth is fairly weak in many parts of the continent, there is pressure on central banks to raise interest rates in order to anchor inflation expectations,” he said.

Naira Risks

The Bank of Ghana kicked off the week’s policy decisions by keeping its benchmark interest rate unchanged at 26 percent on Monday, in line with the forecasts of seven of the 10 economists surveyed by Bloomberg. Kenya’s central bank also opted last week to extend the pause in its interest-rate cycle by leaving the policy rate at 11.5 percent.

In Nigeria, pressure is mounting on Governor Godwin Emefiele to devalue the naira and ease foreign-currency controls that are hurting businesses and worsening the outlook for growth in Africa’s biggest oil producer.

He surprised market analysts at the last Monetary Policy Committee meeting in November by cutting the benchmark rate by 2 percentage points to 11 percent and snubbing calls to weaken the currency.

All but one of the 22 economists surveyed by Bloomberg predict Emefiele will leave the key rate unchanged on Tuesday, with some predicting an adjustment to the naira rate.

Inflation Pressure

“The concerns are that the currency is under pressure, that the currency is misaligned,” Bismarck Rewane, chief executive officer at Financial Derivatives Co. Ltd., said by phone from Lagos, Nigeria’s commercial capital. “Ghana and South Africa have already moved closer to an equilibrium. Nigeria has not really accepted that the currency price is in disequilibrium.”

While the Central Bank of Nigeria has virtually fixed the naira at 197-199 per dollar since March, South Africa’s rand has plunged about 29 percent and Ghana’s cedi is down almost 8 percent in the same period. The National Bank of Angola, which is set to hold an MPC meeting on Jan. 29, has gradually devalued the kwanza since last year as revenue plunged in sub-Saharan Africa’s biggest oil producer after Nigeria.

The rand’s slide to a record-low of 17.9169 per dollar on Jan. 11 is adding to pressure on inflation in South Africa at the same time that the worst drought in more than a century boosts food costs. Inflation accelerated to 5.2 percent in December and is set to exceed the central bank’s 3 percent to 6 percent target band this year. The rand fell 0.1 percent to 16.4859 by 5:23 p.m. in Johannesburg.

Speculation is growing the Reserve Bank will raise the magnitude of its rate increases from 25 basis points. While most of the 23 economists surveyed by Bloomberg predict higher rates this week, 16 forecast the repurchase rate of 6.25 percent will be lifted by at least 50 basis points.

Economic Stability

The MPC decision is the first since the U.S. Federal Reserve raised interest rates in December and President Jacob Zuma shocked financial markets by changing his finance minister three times in the space of five days, triggering a weaker rand.

Governor Lesetja Kganyago said in an interview on Jan. 20 that it’s impossible to avoid the trade-off between growth and inflation and the central bank will “act with resolve” if price pressures stemming from a weaker rand spread more broadly in the economy.

“There’s still room for African central banks to tighten monetary policy,” Courage Kingsley Martey, an economist at Databank Group Ltd., said by phone from the Ghanaian capital, Accra. “It is possible to sacrifice growth for some time and then allow macroeconomic stability to return, else inflation will return to haunt growth.”

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