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Policy Rates: May 2017

Egypt (16.75%, +200bps). The Central Bank of Egypt reaffirmed its capacity to surprise with a 200 basis point hike of the main policy rate (along with others such as the overnight lending rate), on May 21, following a 300bps rise last November when it allowed the EGP to float. Although the resulting sharp depreciation has pushed inflation to over 30% y/y in April, the EGP has stabilised in recent weeks at around 18 per USD and core inflation (which excludes volatile fuel and food prices) has eased slightly in recent months. However, the MPC, with the tacit approval of the IMF who have agreed a $12bn support package, remain particularly nervous about upside price impulses from rising inflation expectations and falling unemployment. Implicitly, they are less concerned about the risk of undermining the recovery via lower credit access, especially for SMEs. Meanwhile, the accompanying rise in debt interest payments will probably sharpen the austerity package which is aimed at drastically cutting the fiscal deficit from last year's 12%. In any case, the MPC's mood music suggests that the CBE will now wait to see how inflation evolves over the rest of the year. Our central expectation is that price growth will start to ease by Q4 as base effects from the fall in the EGP start to dissipate. This should provide some legroom for a policy turnaround in 2018. The next policy announcement is scheduled for July 6.

Ghana (22.50%, -100bps). May 22 saw the BOG follow its 200bps hack in March with a 100 bps cut to 22.5% on the back of downward dynamics in both inflation and price expectations, exchange rate stability and confidence that the fiscal consolidation programme would ease demand-side pressures. Although headline inflation edged up in April to 13.0% in April from 12.8% in March, this appears to be a transport-cost related blip. Food inflation dipped to 6.7% while the Bank's core measure, which strips out volatile energy and utility prices softened to 13.7% from 14.6% in December. With the BOG expecting inflation to continue its descent and reach the medium-term target of 8%+/-2% by 2018, it has increasingly turned its attention towards bolstering activity. Consequently, further easing during the year looks in the offing. The next policy announcement is scheduled for July 21.

Nigeria (14.00%, Unchanged). Despite signs that the current inflation cycle has peaked and the recession is set to end in H2, it was no surprise to see the CBN leave the policy rate at 14% where it has been since July last year (when it hiked by 200 bps). For a start, despite falling for three months in a row, at 17.24% inflation remains well above the 6-9% target band, and food prices are still on an upward trend (19.3% in April). Against this backdrop, the Bank's accompanying May 24 statement highlighted the concern that the disinflation process remains tepid. However, we think it is unduly pessimistic. The gradual easing of FX restrictions, along with the appreciation of the shadow market exchange rate and softer seasonal food price pressures, should see inflation continue to weaken in H2. Nonetheless, although the interest rate cycle looks to have peaked, the MPC is unlikely to start easing policy until headline price growth is close to the target band and price expectations have weakened considerably. Such outcomes look unlikely before 2018H2. The next policy announcement is scheduled for July 25.

Kenya (10.00%, Unchanged). Despite inflation jumping by over 1pp to 11.5%in April, its highest level since May 2012, and food inflation rising by over 1.5pp to nearly 21%, the Central Bank of Kenya kept its powder dry on May 29. At face value, this partly reflected confidence that the pass-through to food prices from the recent drought may be close to peaking. But the accompanying press release also highlights the downside growth risks from the current interest rate cap on commercial lending rates which, along with the drought has weighed on household and business sentiment. In this environment, a hike in the policy rate would only have aggravated downside pressures on the pace of economic activity and the CBK has been right to act cautiously. The upshot is that unless there is a dramatic rise in price growth over the next few months then the CBK will maintain its current policy stance until after the August election. The date of the next policy announcement has not yet been published.

South Africa (7.00%, Unchanged). The recent softening path of inflation which has pushed it within the SARB target of 3%-6% in April alongside a tepid GDP growth outlook (the Bank has revised down its forecasts to 1.0%, 1.5% and 1.7% for 2017-19 respectively), would normally signal some policy loosening. However, the Bank forecast still envisages price growth (5.3% in April) as too close to the upper bound to warrant a rate cut in the face of rand volatility, possible downward moves from ratings agencies and domestic political uncertainty. Upcoming electricity tariff hikes are also an upside risk. So, while the MPC statement notes that "we are likely at the end of the tightening cycle", the policy rate is set to remain at 7.0% for the remainder of the year. The next MPC decision is due on 20 July.

Tunisia (5.00%, +25bps). With inflation rising for six months in a row and reaching 5.0% in April, the CBT raised the policy rate for the second time this year after a surprise 50bps hike in April. The April rise was partly triggered by a slide in the Dinar after the IMF publicly called for more exchange rate flexibility to counter the rising current account deficit. which according to the Tunisian authorities has averaged around 9% during 2014-16. Although economic activity showed signs of recovery in Q1, the outlook for 2017 remains tepid and the authorities may be nervous about activity being squeezed further by a wage-price spiral, especially against a backdrop of 15% unemployment. Nonetheless, further policy tightening looks probable as the authorities attempt to stabilise the exchange rate and inflation. The date of the next policy announcement has not been published yet.

Zambia (12.5%, -150bps). A combination of the steady weakening of headline inflation, standing at 6.7% in April down from over 22% in February 2016, and subdued economic activity prompted the BoZ to cut the policy rate on May 17 by another 150bps following a similar chop in February. The latest snip was also prompted by the central bank's confidence that inflation would remain below the 2017 target of 9% and drop within the medium-term target of 6-8% by early 2019 despite a recent 50% hike in retail electricity prices with another rise due in September. According to the BoZ, these will be offset by an improved agricultural output, the government's ongoing fiscal consolidation and the ongoing stability of the Kwacha against the USD on the back of a pickup in commodity prices and global growth. The BoZ also narrowed the policy rate corridor to +/- 1 percentage point to enhance the credibility of the policy regime. The next policy decision is due on 9 August and given the solidly disinflationary trajectory and concern about weak private sector credit growth weighing on overall economic momentum, the odds are slightly tilted towards a further easing.

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