In 2022, most of the major global Central Banks embarked on an interest rate hiking spree to control excessive levels of inflation. In the U.S, interest rates reached levels not seen since the Global Financial Crisis of 2008, climbing from 0.25% in 2022 to 5.50% in 2023.
Turning point for Major Economies
Within major economies, inflation is now normalizing, and decade-high interest rates have taken their toll on economic growth. Most recently, the European Central Bank, the Bank of England and the Bank of Canada all brought interest rates down. The Bank of Japan is on a different pathway and has only started to increase interest rates this year.
Different story for African Economies
Nigeria and Ghana are still struggling to control inflationary pressures with the latest June annual inflation prints set at 34.2% and 22.8%, respectively. In July, the Central Bank of Nigeria increased interest rates while rates in Ghana, South Africa and Kenya were left unchanged. It is still unclear if African Central Banks will cut interest rates anytime soon.
Potential Implications?
Interest rates in major economies are expected to decrease in the near term. As such, we can also expect those underlying currencies to weaken. How can it benefit African countries?
- Increased Capital Flows: Investors in search of higher returns will flock into African countries with high interest rates, although the associated risk will also play a part in their decisions.
- Cheaper External Borrowing: Falling interest rates in major economies will alleviate the interest payment burden on Sub-Saharan African countries. To note, the region has an external debt (mainly denominated in USD and EUR) which amounted to $702 billion in 2020.
- Inflation Control: Weaker major currencies will benefit import-oriented Sub-Saharan African countries. A stronger local currency and cheaper imports can help control inflation, benefiting consumers and businesses by keeping prices stable.
