Eyes on EA central banks as continent’s big economies raise their lending rates

East Africans are watching their central banks as inflationary pressures push the continent’s and indeed the globe’s big economies to raise lending rates.

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

This comes barely a month after the US raised its central bank rate to one percent from 0.5 percent — the highest in over 20 years — also citing the need to combat the rising commodity prices.

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

But Tatonga Rusike, a sub-Saharan African economist at the Bank of America, told Bloomberg that some African economies like Zambia and Kenya are likely to leave their benchmark interest rates unchanged because inflation rates in these countries are showing signs of slowing down.

Kenyan economist Kwame Owino this week said that Kenya may maintain its Central Bank Rate at seven percent on May 30 when the Central Bank Monetary Policy Committee sits.

Dollar effect

Experts say the higher central bank rate in the US will definitely impact African economies, which are already grappling with inflation, depreciating currencies and a rising debt burden.

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

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

The four big African countries that raised their interest rates recently cited inflationary pressures, which begs the question: What will East African central banks do different, seeing as these challenges are sweeping across the globe?

Central banks’ interest rates have remained stable across the region over time, but some economists now say upward reviews might be inevitable given the global monetary environment and ongoing economic shocks; otherwise they would suffer recession or massive capital flight.

The National Bank of Rwanda raised its interest rate to five percent in February, but maintained it during the last monetary policy review on May 12. It is expected to review it again in August.

The Bank of Uganda is expected to review its interest rate on June 16, having maintained it at 6.5 percent during the last review on April 12, after having lowered it from seven percent in December 2021.

The Bank of Tanzania also maintained its rate at five percent during the last review in March. The rate has been stable since mid-2020 but is expected to be reviewed soon.

In Kenya, the monetary review committee maintained the CBR on March 29 at seven percent, a rate that has held since 2020.

Prevailing uncertainty

History shows that the East African countries are more likely to lower their interest rates than raise them but, considering the prevailing economic conditions, there is no certainty whether this trend will persist.

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

“Raising interest rates will have a negligible effect on inflation rates because, unlike in the US, the rise in commodity prices in the region is mainly due to external shocks that cause currency depreciation,” Owino said.

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

“Nigeria and Ghana are also net exporters of oil and foodstuff, 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, which will make the cost of borrowing more expensive.

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