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AFRICAN central banks should continue to raise interest rates to help absorb price pressures and protect the incomes of their citizens from further deterioration, the World Bank has said.
Monetary authorities in the region, including the country’s Bank of Ghana (BoG), must not fall for the temptation to ease rates in response to the recent falling inflation in some countries, the bank said in the latest edition of its Africa Pulse launched today, Wednesday.
It said lowering rates would be premature but advised that: “Policies to fight against inflation should be complemented by income support measures such cash or food transfers to protect the most vulnerable from stubbornly high inflation.”
The April 2023 edition of Africa Pulse, a biannual publication from the World Bank’s Office of the Chief Economist for Africa was launched during a virtual event under the theme: ‘Leveraging resource wealth during the low carbon transition.’
It was hosted by the bank’s Chief Economist for Africa, Dr Andrew Dabalen, and featured a policy dialogue by experts from the African Center for Economic Transformation (ACET), the Institute for Security Studies (ISS) and the West Africa Citizen Think Tank (WATHI).
Dr Dabalen said inflation remained high and above targets in spite of the early and sizable interest rate
hikes undertaken by African central banks.
“For instance, the monetary authorities in Ghana, Mozambique, Nigeria, South Africa, and Uganda, among others, raised their monetary policy rates swiftly to record highs over the past two years,” he said.
Here in Ghana, BoG raised its policy rate by 1,600 basis points cumulatively since November 2021 when the central bank’s monetary tightening regime started in response to rising inflation.
Within the period, inflation has risen from 12.2 per cent in November 2021 to peak at 54.1 per cent in December last year before decelerating to 52.8 per cent in last month.
In an apparent response, the World Bank’s Chief Economist said the weaknesses in monetary transmission across African countries might explain the reduced effectiveness of the tightening cycle.
“Inadequate tools for policy implementation and lack of policy independence can contribute
to weak transmission. Fiscal dominance and foreign exchange rate restrictions may lead to inflation outcomes that are contrary to what monetary tightening intends,” he said.
But as headline inflation rates peaked in some countries at the end of 2022 and the start of 2023, Dr Dabalen said policymakers might be tempted to ease or pause their contractionary monetary policy stance.
“This action seems premature as underlying inflationary pressures across countries in the region remain high,” he said.
“In Sub-Saharan Africa, curbing inflation remains essential to boost people’s incomes and reduce uncertainty around consumption and investment plans. Policies to fight against inflation should be complemented by income support measures such as cash or food transfers to protect the most vulnerable from stubbornly high inflation—particularly, food inflation,” he added.
According to him, rising food and fuel prices as well as the depreciation of the exchange rate were the main drivers of inflationary pressures in the region, especially in Ghana, Sudan, and Malawi.
“The Ghanaian cedi, the worst performing currency in the region during 2022, posted a depreciation of about 40 per cent. It has weakened an additional 20 per cent so far in 2023,” he said, noting that other currencies with significant losses last year included those of Sudan (23.6 per cent), Malawi (20.7 per cent), The Gambia (14.6 per cent), and Nigeria (10.2 per cent).
The World Bank’s call for further tightening comes at a time when private sector advocates are urging BoG to ease its rate hikes.
In March when the bank raised the policy rate by 150 basis points to 29.5 per cent, the likes of the Association of Ghana Industries (AGI), the Ghana Union of Traders Association and the Ghana National Chamber of Commerce and Industry said the rate hike was inimical to businesses, given that it would keep cost of credit high.
Lending rates have hovered above 30 per cent since 2021 when the economy started feeling the pinch from the strong debt build up, fiscal slippages and the COVID-19 pandemic.
Pull quote
Curbing inflation remains essential to boost people’s incomes and reduce uncertainty around consumption and investment plans
