AfDB Advises African Central Banks to Consider Interest Rate Cut

By Adedapo Adesanya

The African Development Bank (AfDB) has said central banks on the continent should take a cue from advanced economies to ease interest rates, which could ease inflation risks and bring about a recovery in dwindling household purchasing power.

The bank said this in its latest Macroeconomic Performance and Outlook (MEO) report, where it projected that despite enduring global and domestic headwinds, Africa’s medium-term growth outlook is slowly improving.

According to the report, the continent is set to remain the second-fastest-growing region after Asia.

It said that continued exchange rate depreciation in many African countries, the passthrough of higher global commodity prices to domestic prices could keep inflation elevated and undermine the resilience of Africa’s projected economic recovery.

The multilateral lender said that with deceleration coming in the global headline inflation rate which eased to 6.9 per cent last year from 8.7 per cent in 2022, combined with greater price stability, leading central banks are reconsidering their tight monetary policy stance, with a bias toward the downward adjustment of interest rates.

This provides an opportunity for African banking regulators to borrow from the template to boost its currencies and help the weakening household consumption power, the Addis-Ababa-based organisation said.

“If anticipated interest rate cuts or pauses in tightening materialize and if the inflation differential between Africa and the rest of the world narrows, African currencies will recover some losses, reducing imported inflation. If African central banks take a cue from their counterparts in advanced economies, they could start to push down interest rates as risks to high inflation ease.

“Combined with stabilizing prices, this could restore household purchasing power on the continent, raising prospects for higher and stronger economic growth,” it said.

However, these were not without downsides as the escalation of geopolitical tensions in the Middle East and Russia-Ukraine could see African countries be hit hard due to losses in export market access and higher costs of imports of food and energy products, especially as freight rates increase.

If this happens, the AfDB warned that all African regions except North Africa could experience a permanent decline of up to 4 per cent of gross domestic product (GDP) after 10 years due to geopolitical tensions and stand to lose an estimated $10 billion of foreign direct investment (FDI) and official development assistance (ODA) inflows.

“The reduction in FDI would hamper much-needed technology transfer and employment creation, especially among Africa’s young population, with attendant social ramifications. And for countries looking to restructure their debt, deepening geoeconomic fragmentation could worsen coordination among creditors and delay debt restructuring processes.”