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Elections, Russia's wars and rocketing food prices drive up rates

Central banks raise interest rates in three of Africa's biggest economies as fears of inflation outweigh plans for growth

When Kenya's central bank raised interest rates on 30 May for the first time in seven years, it was the latest African economy to follow the lead of the United States Federal Reserve which hiked its benchmark rate by a half a percentage point on 4 May.

The central bankers say they are targeting inflation: now at a four year high of 8.3% in the US; and 7.5% in the Eurozone; around 6.5% in Kenya but over twice that in Ghana and Nigeria.

Will the higher rates bring down inflation, especially the soaring food and fuel prices in Africa? And even if they moderate those trends, higher rates risk slowing the growth so desperately needed to create jobs and boost state revenues after two years of pandemic economics (AC Vol 63 No 10, Alarms sound on debt, inflation and food).

But Africa's central banks are also raising rates to defend their national currencies which have come under pressure this year from the spill-over of Moscow's war on Ukraine and the subsequent interest rate rises in the US and the Eurozone.

And as Angola, Kenya and Nigeria prepare for elections, political campaign spending is pressuring the national currencies. The weakening of national currencies has fuelled inflation in Kenya, Nigeria and Ghana as much as worries about food and fuel supplies (AC Vol 63 No 8, Looking for funds as war disrupts trade).

Companies in Kenya have been complaining about a shortage of dollars that has forced some of them to pay a four-shilling premium when they buy forex on the parallel market, above the official exchange rate of 116 Kenya shillings to a dollar.

But Kenya's central bank governor Patrick Njoroge insists that the supply of US dollars in the market (some US$2 billion a month) was way above local demand so that should not deter companies from importing the necessary raw materials.

Njoroge raised interest rates 50 basis points to 7.5% after consumer inflation hit 6.47% in April, up from 5.56% in the prior month. Few small to medium scale companies borrow from banks to finance their businesses but their local operations are weakened when the shilling falls against the dollar.

Many Nairobi financial analysts expect that interest rates will be increased further in the coming months. But the bank may face pressure from President Uhuru Kenyatta's government to delay further hikes until after the presidential elections in August.

For that reason, many bankers had expected Kenya to hold interest rates this month. Its decision to hike them suggests growing concern about pressure on the shilling.

Last week, South Africa's Reserve Bank raised its benchmark interest rate to 4.75% from 4.25%, hinting that further hikes to borrowing costs should be expected. Credit rating agency Moody's forecast that South Africa's interest rate could hit 8% before the end of 2022.

Ghana raised its headline policy rate from 17% to 19% after consumer price inflation reached an 18-year high of 23.6% in April, while Nigeria's central bank governor Godwin Emefiele hiked rates by 1.5 percentage points to 13% - the first increase in six years. Similar measures have been taken in a dozen African states in the last month.

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