By Rafiq Raji, PhD
This week, the US Federal Reserve and Bank of Japan (BoJ) meet to decide interest rates. Both would be announcing their decisions on 21 September. I don’t expect any surprises from the former. In fact, I would be hugely surprised if the Fed does anything this year. Market participants are a little anxious about the BoJ though, as it tests the limits of negative interest rates and could increase the pace of its stimulus programme. African central banks, in Ghana (19 September), Nigeria (20 September), Kenya (20 September) and South Africa (22 September), would also be announcing their decisions during the week. Between them, their economies represent about 60 percent of sub-Saharan Africa GDP. The Bank of Zambia could also announce its long-awaited decision this week – see earlier 9 August 2016 column (“Zambians and their central bank decide“) for my views. Understandably, they are mostly in hold mode. Not Kenya though. If the east African country’s central bank desires to cut rates, it has room to do so now. Kenyan growth should be almost 6 percent this year. And its inflation outlook is quite encouraging. The others, not so much. Nigeria is in recession – and growth would probably contract for the year, amid high and rising inflation. Ghana is still trying to curb longrunning double-digits inflation, albeit growth is a little decent; about 4 percent this year is my reckoning. For South Africa, currently in a tightening cycle as the inflation outlook remains relatively bleak, growth remains sobering; probably zero percent this year, albeit authorities plan to revise their forecasts upward. The South African Reserve Bank may not find it apropos to raise rates at this meeting. But the outlook suggests it may need to before year-end. At least, that is my thinking at the moment. Ahead of the monetary policy decisions, my firm, Macroafricaintel, published its Q4-2016 outlook reports. Below are some of the thoughts.
Kenya – Room for another rate cut
After having to pause policy easing hitherto on resurgent but likely temporary upward inflationary risks, the Central Bank of Kenya (CBK) could, if it wanted to, cut rates by 100 basis points to 9.5 percent, as early as its monetary policy committee (MPC) meeting this week – last time was in May, when the CBK cut rates by 100 basis points to 10.5 percent. I actually think it could ease policy further by another 100 basis points to 8.5 percent before year-end, when inflation could have eased to about 5 percent. Concerns about fuel price increases, which rose in mid-July amid resurgent insecurity, have since subsided or diminished. There is risk however of potential electricity tariff hikes, as geothermal power plants shut down for maintenance have created a supply gap of about 200MW and imports – that from Uganda (more than 90 percent of imports) up 32 percent in the year to July for instance – of diesel-fired and hydro-powered alternatives to fill it are relatively expensive. Chances are the electricity sector regulator would not entertain any new price hike requests this year; especially since the disruptions are not likely to be secular. Never mind that electioneering is already in high gear. Otherwise, the inflation outlook looks good. The Shilling has been relatively stable and should remain so. My view discountenances the downgrade of the currency by Fitch Ratings in mid-July. Why? The US$1.5 billion IMF precautionary facilities have proved quite effective buffers thus far. No reason why they shouldn’t continue to be.
South Africa – 25bps rate hike likely in November, continued pause in September
After barely coming within range in July at 6 percent, inflation would likely accelerate enough to breach the South African Reserve Bank’s (SARB) 6 percent upper bound target from August to March 2017. I anticipate a justifiable 25 basis point tightening to 7.25 percent at the November MPC meeting, the likely peak of the cycle. Thereafter, it is probable the SARB may see room to start easing rates from Q2 2017. My revised inflation forecasts see the headline averaging above 7 percent for the five months to year-end, from 6.8 percent in August to about 8 percent in December. Drought-induced food price increases are expected to continue, as the prospects for improved rains have diminished significantly. Some rand volatility is also expected towards year-end as expectations gyrate over a potential ratings downgrade to junk status by at least one of the global rating agencies, SPGlobalRatings especially. Political uncertainty would perhaps continue to hover over all considerations in any case. Above-inflation wage deals also weigh on the outlook. In September, auto workers agreed an 8-10 percent wage increase over 3 years with employers. Other labour unions are expected to take a cue from this. In the past, the SARB expressed significant worries about how these wage deals could be differential to its rate-setting decisions.
Ghana – Policy easing probably next year
My inflation forecasts suggest the headline may be about 14.1 percent by December, the 2016 trough of a downward trend since June – level then was 18.4 percent – albeit there is likely a slight pick-up in September, to 17.6 percent in my view. The most recent inflation data showed a slight year-on-year acceleration to 16.9 percent in August from 16.7 percent a month earlier. But the monthly pace was negative, -0.6 percent, after an almost 2 percent average run in the year to July. Ordinarily, this would motivate some serious consideration of a potential easing of policy. Bank of Ghana (BoG) governor, Abdul-Nashiru Issahaku, who in my view is decidedly dovish, would jump at the slightest opportunity in any case. Elections in December, a few months away, requires that the BoG exercise the utmost prudence, however. Thus, I think keeping rates as they are for the remainder of the year would be most appropriate. As I see the inflation rate in the high single digits in Q1 2017 and lower for the remainder of that year, averaging at about 7 percent in 2017 from about 17 percent in 2016, an aggressive easing of policy then might be justfied. My current view is that the policy rate (26 percent going into this week’s meeting) could be cut by 300 basis points in each quarter next year, with the end-2017 level still significantly positive in real terms against my inflation forecast of about 6 percent for December 2017.
Nigeria – CBN tightening pause likely for remainder of the year
Inflation has accelerated since the last monetary policy committee (MPC) meeting of the Central Bank of Nigeria (CBN). The annual headline rose to 17.6 percent in August. My forecasts put it higher in coming months, probably ending the year at 18 percent. A weaker naira, food price increases, higher fuel prices, intermittent power shortages are just a few of the factors that I expect would buoy prices up. Manufacturers have already indicated more of their inputs’ continued price increases would now be passed on to consumers more quickly. Foreign-sourced inputs continue to be expensive because foreign exchange remains relatively scarce and dearer. Supply of local alternatives have not kept pace with increased demand. The prices for staples have also gone up, bread for instance, hiked by 20 percent in mid-August. After raising the monetary policy rate (MPR) by 200 basis points to 14 percent in May (after a 100 basis points spike to 12 percent in March), amid backlash from influential members of President Muhammadu Buhari’s administration, there are strong signs the CBN would be reluctant to raise rates further. There have even been threats of cutting interest rates via legislation. A likely economic emergency stabilization bill to be tabled before the legislature this month, I fear, may be used to do just that. The CBN governor, Godwin Emefiele, probably had this at the back of his mind, when he recently signalled all tools within the reach of the CBN, would be used to stimulate the economy. I interpret this to mean the apex bank would resort to more unconventional monetary easing. For instance, plans are afoot to boost the capital base of the government-supported Bank of Agriculture. The Bank of Industry could also get a boost – I suggest this in any case. The Nigerian Export-Import Bank (NEXIM) is another government-backed institution that could use some help. My view remains unchanged: the CBN should focus on its primary mandate of price stability. And it should tighten policy as necessary. But then there is now a need for it to balance that mandate with needed political pragmatism. The CBN needs to be able to set interest rates in the first place. That type of pragmatism, it must also extend to not making the mistake of overstretching itself: the CBN’s capacity to stimulate the economy is overrated. And it should not be easily forgotten that it tried to do just that without much success in the recent past. Banks, the health of which remains concerning (about 15 percent or more of total loans outstanding is either bad or non-performing), are currently undergoing a thorough examination by the CBN. Little things like these – tweaking regulations to ease flows, directing capital to neglected sectors, providing incentives to manufacturers, cleaning up banks and so on – could be more far-reaching and effective than undermining whatever monetary policy credibility it currently has.
Also published in my BusinessDay Nigeria newspaper back-page column (Tuesdays). See link viz. http://www.businessdayonline.com/en/african-central-banks-decide-on-rates/