CEMAC Rates To Remain Stable In 2014

BMI View: Contained inflation in most states and a regional economic recovery make it unlikely that the BEAC will cut rates again in 2014. Were the central bank to act, however, BMI stresses that Central Africa's shallow financial system and weak transmission mechanisms mean that a change in monetary policy would have little impact on the region's economy. Risks are weighted towards a further cut rather than a rate hike.

The Banque Centrale des Etats d'Afrique Central (BEAC) elected to hold its key interest rate at 3.25% at its last monetary policy meeting of 2013, and we believe that the bank is likely to keep interest rates steady for the duration of 2014. The bank, which controls monetary policy for the six-member Communauté Économique et Monétaire de l'Afrique Centrale (CEMAC) has traditionally followed a conservative interest rate policy, and this informs our forecast of policy stability.

The two interest rate cuts seen in 2013 were very much an exception, and we expect that on-target inflation will prevent another cut. While economic growth is accelerating, BMI believes that the recovery in CEMAC is still sufficiently fragile that a hike is unlikely. Even in the event of a change to interest rate policy, however, BMI stresses that the bank's monetary policy has a minimal effect on the real economy of the CEMAC states.

Steady As She Goes
CEMAC - Key Interest Rate, End-Of-Year (%)

CEMAC Rates To Remain Stable In 2014

BMI View: Contained inflation in most states and a regional economic recovery make it unlikely that the BEAC will cut rates again in 2014. Were the central bank to act, however, BMI stresses that Central Africa's shallow financial system and weak transmission mechanisms mean that a change in monetary policy would have little impact on the region's economy. Risks are weighted towards a further cut rather than a rate hike.

The Banque Centrale des Etats d'Afrique Central (BEAC) elected to hold its key interest rate at 3.25% at its last monetary policy meeting of 2013, and we believe that the bank is likely to keep interest rates steady for the duration of 2014. The bank, which controls monetary policy for the six-member Communauté Économique et Monétaire de l'Afrique Centrale (CEMAC) has traditionally followed a conservative interest rate policy, and this informs our forecast of policy stability.

Steady As She Goes
CEMAC - Key Interest Rate, End-Of-Year (%)

The two interest rate cuts seen in 2013 were very much an exception, and we expect that on-target inflation will prevent another cut. While economic growth is accelerating, BMI believes that the recovery in CEMAC is still sufficiently fragile that a hike is unlikely. Even in the event of a change to interest rate policy, however, BMI stresses that the bank's monetary policy has a minimal effect on the real economy of the CEMAC states.

A shallow financial system, a poorly integrated regional economy, and weak transmission mechanisms mean that BEAC interest rates are an ineffective instrument of economic policy-making. The underlying growth and inflationary dynamics of the CEMAC states will be largely dependent on oil production, political risk, and local food prices.

Mostly On Target
CEMAC - Selected States' Average CPI Inflation, %

The BEAC inflation convergence target is 3.0%; all six states are mandated to maintain average annual consumer price growth below this level. BMI forecasts that only three member states will succeed in reaching this goal in 2014. While this may seem like a poor performance, we stress that the three states experiencing on-target price growth will be Cameroon, the Republic of the Congo (Congo-Brazzaville), and Gabon. These three states are CEMAC's dominant economies, and we calculate that they collectively make up 71.6% of the bloc's total GDP.

Price growth will be significantly above target in the Central African Republic (CAR) due to the violently anarchic political situation in the country, but the bloc's smallest economy is unlikely to weigh heavily on monetary policy-making in Yaoundé. We predict that inflation will be slightly above the 3.0% threshold in Chad, and that price growth will remain high in Equatorial Guinea. The oil-producing country has a history of high inflation - due to high government spending - and has not met the BEAC's inflation criteria since 2007 (see 'Slower Price Growth in Francezone's High Inflation Outlier', February 2013).

Overall, BMI predicts CEMAC-wide inflation to be lower in 2014 than in 2013. This forecast of contained price growth leads us to believe that there will be little pressure for an increase in interest rates.

Food Prices Key Driver
Cameroon - Wheat Imports, Tonnes (LHS) & Wheat Prices, USc/Bushel (RHS)

The main driver of lower inflation in Cameroon, CEMAC's largest economy, will be reduced food costs. BMI's Agribusiness team predicts that global wheat prices will average just USc610 per bushel in 2014, a significant fall compared to the USc690 per bushel experienced in 2013.

Growth Picking Up
CEMAC - Real GDP Growth, %

BMI had previously predicted that a further rate cut was probable in 2014, with the BEAC likely to take its key interest rate to 3.0%. Our forecast had been based on the belief that slowing real GDP growth across CEMAC would push the BEAC to continue its hiking cycle in an attempt to boost lending and shore-up domestic consumption.

Now, however, BMI believes that economic expansion is already picking up in most of CEMAC. We have recently upgraded our growth forecasts for Gabon (see 'Data Revision Leads To Forecast Upgrade', January 20), and Congo-Brazzaville (see 'Oil Production To Boost Headline Growth', January 27), two of CEMAC's largest economies.

We forecast that the bloc will experience real GDP growth of 4.7% in 2014, a significant improvement compared to the 3.5% which we estimate for 2013. This growth figure is still weak by African standards, but it indicates that the bloc is weathering the economic headwinds imposed by weak foreign demand, lower energy prices, and stagnating oil production in several states.

Given above-expectations growth, BMI believes that the BEAC is likely to hold rates at 3.25% in order to see if the current period of economic acceleration is sustainable. Interest rates are already at all-time lows, and we do not believe that the bank will be willing to make a further cut - thus robbing itself of the ability to spur economic growth during a future slowdown.

Low Impact Policy-Making...

Even if the bank does decide to change its interest rate policy, BMI stresses that this would have a minimal impact on the economies of CEMAC. There are few mechanisms by which monetary policy is able to affect economic demand within the bloc's economies, which are largely undeveloped and highly dependent on oil exports. A recent IMF report noted that banks' deposits at the BEAC were steadily rising, likely because the lack of an active lending market or a scarcity of borrowers was providing a structural impediment to lending.

One such impediment is low average incomes, which - combined with the minimal spread of banking institutions - prevent most consumers from CEMAC countries from accessing credit. Even in Cameroon - the CEMAC state with the most developed financial sector - just 15% of the population have access to a bank account. This compares to just under 25% for Sub-Saharan Africa as a whole. Since these obstacles are not dependent on interest rates, a change in monetary policy is likely to have little impact on demand for credit - and hence on consumption. Investment spending is largely funded by governments or foreign investors, both of which borrow on the international market (see ' CEMAC Rate Cut Will Have Little Impact, November 6).

..From Bank With Little Influence

The inability of the BEAC to impose its authority on CEMAC economies can also be seen through the bank's failure to force national governments to adhere to the agreed fiscal and economic goals. Figures from the IMF suggest that the majority of CEMAC states will breach at least one of the bloc's core convergence criteria over the coming years.

No-One Following The Leader
CEMAC - Convergence Criteria Breached

The BEAC's relative lack of influence means that its policy making decisions have little impact on the economies of CEMAC. We do not believe that the bank will change its interest rate policy in 2014, and equally doubt that any move would have a large effect.

Key Risks To Outlook

The most likely risk to this forecast is a further 25 basis points cut, which would become more likely if economic growth surprised to the downside in the second half of the year or if the bank decided that the success of its 2013 loosening cycle merited a repeat cut.

×

Enter your details to read the full article

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.

×

REQUEST A DEMO

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.

Thank you for your interest

A member of the team will be in touch shortly to arrange a convenient time for your free demonstration and trial. If your enquiry is urgent, please email our Client Services team here.