African Central Banks to Take Divergent Paths On Interest Rates

27 January 2025
Daba Finance (Abidjan)

TLDR

  • African central banks representing nearly three-quarters of the continent's GDP are expected to adopt varying approaches to interest rates
  • Factors influencing these decisions include inflation trends, exchange rate stability, and the impact of global monetary policies, particularly from the US
  • Domestically, improving agricultural output and recovering commodity sectors could ease inflation pressures in some countries later in the year

In the coming month, African central banks representing nearly three-quarters of the continent's GDP are expected to adopt varying approaches to interest rates. Factors influencing these decisions include inflation trends, exchange rate stability, and the impact of global monetary policies, particularly from the US.

South Africa and Kenya are expected to cut rates, leveraging inflation levels below their target midpoints. The Reserve Bank may reduce its benchmark by 25 basis points to 7.5%, citing subdued inflation and high real rates. Kenya, after last month's 75 basis-point cut, may opt for a slower pace of easing. Egypt, where double-digit inflation has begun to ease alongside currency stability, is also anticipated to cut rates for the first time in years.

Countries like Nigeria and Ghana will maintain high interest rates to curb double-digit inflation and stabilize currencies. In Mozambique, inflation concerns tied to election-related disruptions will likely keep rates unchanged at 12.75%. Uncertainties surrounding US policies and Federal Reserve actions will influence African central banks, particularly regarding the impact on commodity prices and exchange rates. Domestically, improving agricultural output and recovering commodity sectors could ease inflation pressures in some countries later in the year.

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Key Takeaways

The divergence in African monetary policies reflects differing inflation dynamics and economic conditions. Nations like South Africa and Kenya are taking advantage of low inflation to ease rates, while others, including Nigeria and Ghana, prioritize currency stabilization and inflation control. Global risks, particularly from potential US inflationary policies and Federal Reserve actions, remain central to policymakers' considerations. The direction of African monetary policy will continue to depend on balancing domestic recovery with external economic pressures.

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