NEWS ANALYSIS-Sub-Saharan Africa: Monetary policy – Holding pattern

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By Yvonne Mhango

WED, JULY 26 2017-theG&BJournalIn Nigeria, the monetary policy debate has moved to holding or cutting the policy rate. So, we revise down our YE17 policy rate forecast to 14%, from 18% previously. As we see limited downside to Nigeria’s inflation, this means real interest rates – on short-dated debt – may remain negative. In Kenya, where we see flat rates in the short term, we believe a fall in inflation will help restore positive real rates. In Ghana and Zambia, we think there is scope for a 50-100-bpt cut before YE17, without compromising positive real rates.

Nigeria: Rate hike is off the table, for now

Six of eight monetary policy committee (MPC) members elected to keep the policy rate at 14.0%, on 25 July. Two voted to ease policy. At the previous MPC meeting in May, the decision to hold was unanimous. Nigeria’s MPC debate has moved to holding or easing policy. While the MPC is mindful of the need to support fragile growth, the committee is wary that rate cuts may undermine FX stability, not least by entrenching negative real interest rates. The MPC is also wary of inflationary pressures from strong government spending. The budget deficit widened to NGN2.51trn in 1H FY17, according to the MPC, vs the FY17 target of NGN2.32trn. We believe the committee’s mention of FX stability and lower inflation in 2H17, on the back of 3Q17 harvests, lowers the probability of a rate hike. So, we revise down our YE17 policy rate forecast to 14%, from 18% previously. Although a rate hike is no longer our base case, we think the risk to the policy rate remains to the upside, because inflation bottoms in the early teens, by our estimate.

Kenya: Policy stance likely to remain unchanged in short term

Kenya’s MPC kept its policy rate at 10%, on 17 July. Now inflation is slowing, the upside risk to the policy rate has dissipated. Following five months of acceleration, YoY headline inflation slowed to 9.2% in June. The central bank expects inflation to continue moderating on the back of lower food and fuel prices. We see inflation falling back into the central bank’s 2.5-7.5% target region by 1Q18 and a flat policy interest rate in the short term. This implies the real policy rate, which turned positive in June, will edge up in the short term. A rate cut to shore up anaemic YoY credit growth – 2.1% in May vs 11.2% a year ago – would not have the desired effect, in our view, because the interest rate cap implies even more borrowers would be priced out of the market, further undermining credit growth. In the event of potential violence surrounding the 8 August elections, the risk of a rate hike to stabilise the overvalued shilling increases. Our YE17 FX forecast is KES109/$1.

Ghana: One more rate cut in the offing before YE17

Ghana’s MPC’s 150-bpt policy rate cut on 24 July – to 21% – was bigger than the consensus expectation of a 100-bpt cut. Slowing core inflation (excludes energy and utility prices) and expectations of a further slowdown in inflation (according to recent surveys), explain the MPC’s decision. An improving current account balance and sharp increase in FX reserves in 2Q17 implied the cedi is well supported, in the wake of monetary easing. We maintain our YE17 policy rate forecast of 20%, implying we think another 100-bpt cut is likely by YE17. The central bank expects inflation in the 6-10% target range in 2018. On our model, this happens in September 2018. Even then Ghana will still have one of the highest positive real rates in the region, implying it will continue to attract FX inflows. This is positive for the undervalued cedi – which we see at GHS4.9/$1 at YE17 – and by implication, inflation.

Yvonne Mhango is analyst at RenCap

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