Africa questions inflation targeting

• Continent’s central banks’ mandates under microscope

African countries’ central banks have over the past year been forced to front-load interest rates in an attempt to curb inflation and protect exchange rates, while having to deal with deteriorating economic growth prospects. These issues have placed the mandate of their central banks under a microscope, with most governments questioning inflation targeting.

African countries’ central banks have over the past year been forced to front-load interest rates in an attempt to curb rising inflation and protect weakening exchange rates, while having to deal with deteriorating economic growth prospects.

These issues have placed the mandate of African states’ central banks under a microscope, with most governments questioning the inflation-targeting mandate of their monetary policies — decisions that led to excessive borrowing costs, while inflation continues to remain above the upper band of the inflation bracket.

“Maintaining central bank independence at a time of high interest rate policy and high government debt is crucial. But to stand the course while everything is going up, I think it takes a lot of courage and that’s where the issue of an independent central bank becomes critical because you get all these pressures (from politicians, trade unions and policymakers) on what you do,” Bank of Zambia governor Denny Kalyalya said in his closing remarks at the Africa Finance Industry Summit (AFIS) in Lomé, Togo, last week.

African countries came out of the Covid-19 pandemic with high fiscal deficits and high debt and with Russia’s war in Ukraine have to contend with rising inflation.

According to the World Bank’s latest Africa’s Pulse report, economic growth in SubSaharan Africa is set to decelerate from 4.1% in 2021 to 3.3% in 2022, a downward revision of 0.3 percentage points since April’s Pulse forecast, mainly as a result of a slowdown in global growth, including flagging demand from China for commodities produced in Africa.

The Ukraine war worsened already high inflation and continues to weigh on economic activity by depressing business investments and household consumption.

The World Bank said that in July 29 of the 33 countries in the region had inflation rates above 5% while 17 countries had double-digit inflation. As a result of runaway inflation, central banks of Africa’s big economies have raised rates by 50 basis points (bps) to 250bps in an attempt to tame inflation.

Ghana raised its repurchase rate by 250bps last week to 27%, above market expectations and reaching the highest level in 19 years.

The Central Bank of Nigeria hiked the monetary policy rate by 100 bps to 16.5%, lower than September’s 150 bps hike. The Bank said it did not consider loosening the policy stance, as pausing ahead of the coming festive season, when spending is likely to increase significantly, would “greatly jeopardise the gains of the previous policy rate hikes and plunge the economy deeper into the inflation trap”.

Kenya’s central bank raised its policy rate by 50 bps to 8.75%, in line with the Bloomberg consensus and lower than the 75 bps hike at the September monetary policy committee meeting. This was despite the recent acceleration in inflation and probably reflected the committee’s concern about the growth outlook or its expectation that inflationary pressures will soon begin to abate. SA recently lifted rates by 75 bps for a third successive time, moving the repo rate from 6.25% to 7%, making for the steepest increases in two decades.

Speaking at the panel discussion at the summit, Bank of Ghana governor Ernest Addison said inflation is here and the fiscal situation has deteriorated badly. “We have suffered shocks from the war in Ukraine and our currency has significantly depreciated.

“We find ourselves in a situation where we’re exposed,” Addison said. “When you find yourself in our situation, where do you go? Usually, Washington (IMF and the World Bank), but these two institutions need to be more responsive. We don’t belong to G20, that’s why.”

“Ghana’s cedi was stable before 2022. But once we were unable to borrow, it became a big shock to our economy, plus the Ukraine war, and the restrictions, it has been shock after shock after shock,” he said.

In a round-table discussion, Central Bank of Kenya governor Patrick Njoroge said African countries are not only fighting inflation, “we are fighting the spillovers from advanced economies.

“That has made our lives a lot harder in many ways. So when central bank governors are struggling, they are not struggling because of inflation per se, they are also struggling because there are a lot of other things that are coming our way,” said Njoroge.

“The other point that is important is the turbulence in the financial markets that the strengthening of the USD (US dollar) has caused and also that meant shutting us out of the global financial markets.

“That in itself has had additional spillover effects.”

WE ARE FIGHTING THE SPILLOVERS FROM ADVANCED ECONOMIES. THAT HAS MADE OUR LIVES A LOT HARDER IN MANY WAYS