FOREX Africa: Are African Central Banks Second Guessing Rate Hikes?

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Written by Kevin Mwanza

As a frontier market, the countries of Africa represent both tremendous opportunities and tremendous risks. On the risk side of the ledger are all the usual complications of international trade and investment compounded by the problems inherent in a developing, emergent continental market consisting of 54 countries and 1.1 billion people – it’s a lot to keep track of.

Luckily, the ups and downs of the African currency markets aren’t one of them if you know where to look. To help with that, AFKInsider has compiled all the news you need to know now in order to slim down your currency risk in the week ahead. Let’s see what’s happening out there.

Hold On

A July 28 FOREX Africa report on AFKInsider looked at how central bank’s across sub-Saharan were hiking key lending rates to save local currencies against a rout that has largely been caused by falling commodity prices on the international markets.

Many African currencies have depreciated against a globally stronger dollar this year, pushing policymakers and central bankers across the continent to hike interest rates and introduce tighter foreign exchange trading rules in a bid to make it harder for speculator to bet against their local unit.

Banking regulators in countries like Kenya, South Africa, Nigeria, Tanzania, Uganda and Ghana have hiked their benchmark interest rates to stem local currencies from hemorrhaging  further against the greenback, with some level of success for a few.

But over the last two weeks the trend seem to be changing, with Kenya and Zambia holding their benchmark interest rates, while Botswana bucked the regional trend by cutting its key rate for the second time this year.

Kenya’s central bank surprised the market on August 5, when it kept its benchmark interest rate at 11.5 percent in the wake of a 300 basis point increase in the past two months. A Reuters poll before the rate decision had indicated that the market expected the rate to be increased to 12 percent.

In making its decision the Central Bank of Kenya (CBK) cited that the previous rate hikes had not filtered into the market and they expected the market tightness in the money market to keep the shilling in check for now.

“The economy is not firing on all cylinders and a further interest rate hike transmitted through the economy is going to slow down things,” Aly Khan Satchu, an Independent analyst from Rich Management told Reuters after the announcement.

In Zambia where the local currency, the kwacha, is one of the world’s worst performing currencies this year,  policymakers also left the benchmark interest rate unchanged at 12.5 percent last week, saying it predicted inflation would be within target by the end of the year.

The Zambian government has also been taking austerity measures to cut down on unnecessary spending to rein in a growing budget deficit, something the country’s central bank believe will support its monetary decision and bring stability to the local currency.

Bucking the trend

Further South, the Bank of Botswana cut its main lending rate by 50 basis points to 6 percent.

Like any other African country, the world’s largest diamond producer is facing reduced revenue as commodity prices remain suppressed globally, its fiscal surplus in previous year and strong levels of foreign exchange reserves has made it easier for the central bank to support the pula.

“The current state of the economy as well as the domestic and external economic outlook, including the inflation forecast, suggest that easing monetary policy is a step in the right direction,” the Bank of Botswana said when it announced the latest rate cut.

Analysts however say  this does not mean that the rate hike cycle is over. Several countries, including Kenya and Nigeria are still putting up measures to tighten their markets.

Kenya’s central bank governor hinted that he may raise interest rates in his coming monetary policy meetings as the shilling  is still being battered, while Nigerian policymakers have introduced further foreign exchange trading restrictions.