Tuesday, September 06, 2016 6.38pm/ BMI Research
BMI View: The Banque Centrale des Etats des l'Afrique de l'Ouest will hold rates firm over the next 18 months as the West African franc's peg to the euro and benign external pressure keep price growth low. The stable environment will encourage ongoing investment in the eight countries of the Union Economique et Monétaire Ouest Africaine.
Investors will continue to favour Côte d'Ivoire and Senegal over the coming years as their strong growth outlook and effective fiscal management is supported by a coherent monetary policy from the regional central bank.
We expect the Banque Centrale des Etats de l'Afrique de l'Ouest (BCEAO) will hold interest rates steady at 3.5% over the remainder of 2016 and to H118 at least, as inflation will remain below the Union Economique et Monétaire Ouest Africaine (UEMOA) convergence rate of 3.0%.
Strong economic growth in the bloc's two largest economies will precipitate a moderate tightening of monetary policy in H118, which would represent the first shift in interest rates since 2013. This hiking cycle would likely be incremental, with a 25 basis points (bps) hike in the first instance.
Rates Will Be Held Over Next 18 Months
At its latest monetary policy meeting, held on June 1, the BCEAO elected to maintain interest rates at 3.5%, the level to which they were cut in September 2013 and we expect the bank will continue to maintain rates at this level for at least the next 18 months.
Inflation in the UEMOA currency bloc – which comprises Benin, Burkina Faso, Côte d'Ivoire, Guinea Bissau, Mali, Niger, Senegal and Togo – has been very low in the last few years, averaging just 1.0% in 2015 and we expect it will remain sedate over the next 18 months.
UEMOA's currency, the West African franc, is pegged to the euro and this helped the region avoid the volatility and sharp selloffs in many Sub-Saharan African countries.
We do not expect any adjustment to the peg in the foreseeable future, which will mean continued price stability.
Nevertheless, we envisage aggregate UEMOA inflation rising to about 1.6% by end-2016 and 2.2% by end-2017. We forecast year-end inflation this year will be 2.5% in Côte d'Ivoire and 1.5% in Senegal. The two countries account for 38.0% and 13.1% of UEMOA GDP respectively and so rising inflation there will inform the overall price growth of the bloc.
Price growth in UEMOA countries will be driven by a number of external and internal pressures. In terms of exogenous drivers of inflation, the primary of these will be rising oil prices.
Our Oil & Gas team forecasts Brent crude will average USD53.0 per barrel (/bbl) in 2017, compared with USD46.5/bbl in 2016. H216 will already see higher oil prices than H215 and this will begin to feed through to all components of the consumer price index inflation basket, not just transport.
Pump prices have fallen to XOF570/litre in Côte d'Ivoire and XOF695/litre in Senegal, from XOF740/litre and XOF889/litre respectively in January 2014, and this has been one factor behind low inflation rates.
As global oil prices pick up, even if only modestly, there will be a rise in the price of petrol at the pump. Food prices are the other key driver of UEMOA inflation and the outlook here is also benign, with some modest inflationary pressures.
The risk of weather-related food shocks sharply pushing up prices in parts of the UEMOA bloc, especially the Sahelian countries of Burkina Faso, Mali and Niger, can never be discounted.
This is especially the case given high levels of poverty in UEMOA countries means food accounts for a considerable share of their CPI baskets, as much as 40% in some cases.
However, according to the Famine Early Warning System, the food security outlook is mostly stable across the region over the remainder of 2016, except for distressed parts of Niger where the Boko Haram insurgency has displaced populations. Rather, we expect food price growth will be driven by rises in rice prices