CBK inflation management sets pace for major African markets

The Central Bank of Kenya (CBK) market-oriented approach in dealing with inflation and forex pressure in second-half 2015 has emerged as a blueprint for African economies with volatile markets, investment bank Exotix partners says.

Kenya, faced with a problem of rising inflation and a weakening currency mid last year, instituted two successive base rate hikes (from 8.5 to 11.5 per cent between May and July), aggressively defended the shilling and allowed higher rates on government securities to attract foreign exchange.

The Treasury has also reacted by tempering spending, thus aligning fiscal policy with monetary policy measures taken by the CBK.

Exotix says in a research note that other major African economies such as Egypt and Nigeria are starting to adopt measures similar to those taken by Kenya last year to address the monetary pressures.

“Over the past few months, Kenya has seen a stabilising of inflation within the CBK’s target range, a significant reduction in pressure on the exchange rate, a narrowing of the current account deficit (down 25 per cent in the 12 months to November 2015), and an increase in official reserve cover to the highest level in over a year,” said the UK-based Exotix in the report.

“It has achieved this with open and flexible capital markets, and from a starting point that could easily be considered worse than where Nigeria or Egypt are today.”

Exotix says that both Nigeria and Egypt seem more willing to allow a greater role for markets to drive policy objectives, similar to the stance taken by Kenya’s CBK.

In the past two weeks, the Central Bank of Egypt has raised policy rates by 150 basis points to 10.75 per cent and adopted a more flexible exchange rate in order to attract foreign exchange inflows.

The Central Bank of Nigeria on its part has reversed its stance to raise policy rates by 100 basis points to 12 per cent, increased the Cash Reserve Requirement for banks to 22.5 per cent to cut liquidity and indicated it is willing to change the country’s fixed exchange rate regime.

Most of African economies had to contend with weakening currencies and wider deficits as the dollar strengthened across the globe amid low commodity prices.

The shilling depreciated by about 12 per cent last year to the dollar, although there were other African currencies that shed more in value to the greenback.

This year though, the shilling has appreciated slightly to the dollar, emerging as one of the most stable currencies in the continent.

Inflation has also been coming down, standing at 6.84 per cent in February from 7.78 per cent in January and 8.01 per cent in December 2015.

The CBK, according to Citi analysts, is likelier to cut the base rate than increase it in upcoming Monetary Policy Committee (MPC) reviews as a result of the stability of the indicators. In the last MPC meeting though the regulator held the rate steady.