16/12/2022
Should Central Banks in Africa continue with a tight monetary policy rate?
During Covid19 supply chain was disrupted, that affected producers around the world, living them with huge inventories in their warehouses, this had a huge impact on market prices until when the borders started reopening again coupled with the Covid19 relief fund to individuals and businesses. The American Rescue plan provides $350 billion in emergency funding to respond to the COVID-19 emergency and bring back jobs, in UK £1.5 billion fund assigned to the COVID-19 Additional Relief Fund (CARF), to help businesses not eligible for other business rates reliefs. That then put a lot of pressure on manufacturers with limited production capacity to meet rising demand. Hence, the rise in prices, particularly oil and gas⛽️. China foresaw this situation coming and took advantage of the low fuel prices.
In the mix of all that, the war started in Ukraine, then the West decided to self-impose sanctions from buying the Russian oil and gas knowing perfectly that they do not have an alternative. So what next? "Play the geopolitics card" which is buying Russian fuel from different sources indirectly. This created an artificial shortage of fuel on the market, driving prices up even further.
The high cost of fuel and the strong dollar drove inflation up in many countries around the world, therefore, a high Cost Of Living (COLA).
In order to deal with high inflation, the Federal Reserve of the United States 🇺🇸 tightened its policy rate and other central banks around the world followed suit even though the inflation was an imported one for most of the developing countries.
In Africa, regardless of the rise in inflation, Central Banks need to reconsider their stance on the policy rate. Raising monetary policy rate will not necessarily deal with inflation in our case, it affects the private sector with the high lending cost, which also lead to high cost of doing business. SMEs, specially in the manufacturing sector will be the most hit by this measure.
