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Inflation, growth fears keep SA, Nigeria rates steady

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Setting interest rates in both nations is complicated by above-target inflation and poor economic performance.



David Malingha Doya, Emele Onu and Arabile Gumede, Bloomberg


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25 January 2017&nbsp08:52

The central banks of Africa’s two largest economies held borrowing costs steady on Tuesday as they face accelerating inflation and tepid growth.

South Africa’s Reserve Bank left the benchmark rate at 7% for a fifth straight meeting, and Nigeria’s monetary policy committee kept its key lending rate at 14%. That was in line with the forecasts of all economists in two separate Bloomberg surveys.

Setting interest rates in both nations is complicated by above-target inflation and poor economic performance. The key lending rate in South Africa has remained unchanged since March after the MPC raised it by 200 basis points since 2014 in a bid to keep price growth within the central bank’s target band of 3 percent to 6 percent. In West Africa’s biggest economy, the monetary policy rate has been at a record since July, despite pressure from government officials, including Finance Minister Kemi Adeosun, to cut borrowing costs to support growth.

Nigerian “inflation is still high and the government is expected to apply fiscal means to stimulate the economy,”  Kunle Ezun, an analyst at Ecobank Transnational in Lagos, said by phone. “When that is done, the central bank can begin to cut the rate to create stability.”

Inflation in Nigeria accelerated to an 11-year high of 18.6% in December. Central bank Governor Godwin Emefiele told reporters that while consumer prices remain under pressure, they will start to subside as the economy begins to recover and the naira’s exchange rate stabilizes. His South African counterpart, Lesetja Kganyago, raised the Reserve Bank’s price-growth forecast, pushing out its return to within the target band to the final quarter of this year.

Inflation expectations

“Against a backdrop of inflation expectations that are already quite elevated in South Africa and are very sticky, they are erring on the side of caution,” Arthur Kamp, chief economist at Sanlam Investment Management, said by phone from Cape Town.

Low metal prices, weak global demand and a drought probably cut expansion in South Africa last year to the lowest since a 2009 recession, according to central bank estimates. The Nigerian economy may have shrunk by 1.5% because of low oil prices and a fall in production, according to the International Monetary Fund. This would be the first full-year contraction in more than two decades as government revenue was cut by half.

The IMF forecasts the economies of both South Africa and Nigeria may expand 0.8% this year.

Both Kganyago and Emefiele highlighted uncertainty about future US policy and possible trade protectionism as risks to economic growth. That and the U.K.’s vote last year to leave the European Union have led to unpredictability about future capital flows into emerging markets and the effect on currencies.

“There is still a great deal of uncertainty regarding the policies of the new administration, particularly with respect to the size of the promised fiscal stimulus,” Kganyago said in reference to the US. “While some of the initial optimism has since been tempered somewhat, US. growth is expected to be relatively strong, but with some downside risks posed by a stronger dollar.”

The rand gained almost 13% against the dollar in 2016, and was little changed at 13.3813 per dollar at 7:21am in Johannesburg on Wednesday. The naira weakened as much as 3.4% on Tuesday before ending the day steady at 306 to the dollar.

The naira has lost about a third of its value against the dollar since June, when authorities removed a peg. Shortages of foreign currency have sustained the black market, where importers of items from rice to dairy products source dollars at rates about 30% higher than those on the official market, adding to inflation pressure.

While the Nigerian MPC is committed to reducing borrowing costs when the conditions permit it, a cut on Tuesday could have added to inflation, stunted economic growth and undermined the outlook for stability in the currency market, Emefiele said. 

© 2017 Bloomberg

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