Central banks in Nigeria and Kenya to hold rates next week

Nigeria and Kenya will both leave monetary policy unchanged next week, a Reuters poll forecast, as inflation in the former is not yet tame enough, while an interest rate cap in the latter limits policymakers’ room for manoeuvre.

All 15 analysts polled this week said rates would be held at 14.0 per cent in Nigeria and 10.0 per cent in Kenya. Nigerian inflation is slowing but remained high at almost 16 per cent year-on-year in October, while by contrast, Kenya is ripe for easing with annual inflation falling to 5.72 per cent last month.

However, the Kenyan central bank is hamstrung by the cap imposed last year that limits commercial lending rates to 4 percentage points above its official rate. “The interest rate cap in Kenya and the multiple exchange rate regimes in Nigeria creates problems for monetary policymakers,” said William Jackson at Capital Economics.

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Rates are expected to be cut by 100 basis points in either July or September 2018 in Nigeria to 13 per cent but will remain stable in Kenya throughout next year. There is a high degree of uncertainty over next year’s rate path for Kenya. The cap has led to banks deciding that a large number of borrowers – mainly small traders and informal sector workers – are too risky to receive loans.

If rates fall further, the banks are likely to exclude yet more would-be borrowers from the credit, effectively tightening rather than easing monetary conditions.  Central bank Governor Patrick Njoroge has said the cap would eventually be removed, but the timing is uncertain.

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Nigeria added the Investor and Exporter Foreign Exchange Window rate to the already five exchange rates in late April, where buyers and sellers are free to agree on a rate, to try and attract foreign investors into the country. “In Nigeria, the multiple exchange rate regime is a symptom of strains in the balance of payments that mean interest rates need to be high to attract capital inflows,” Jackson said.

Before the window was introduced, the central bank was the main supplier of hard currency on the interbank forex market after foreign investors fled naira assets in the wake of an oil price slump in 2014. Foreign investors have welcomed the opportunity to trade the naira at market-determined rates and the International Monetary Fund has urged the central bank to dump its multiple exchange rate systems to boost the economy.

In South Africa, economists have ruled out rate cuts next year due to political uncertainty and budget shortfalls at the Treasury alongside a possible sovereign credit rating downgrade on Nov. 24.