Amid worries over slowing global economic growth, central banks in the East African Community (EAC) are adopting monetary easing policies, similar to their counterparts around the world.
Reports show apex banks in the region have been lowering interest rates and cash reserve ratios (CRR) as they try to stimulate economic growth through increased spending and private investment.
The Bank of Uganda (BoU) last week decided to keep it’s Central Bank Rate (CBR) at 9 percent on the basis that there are likely to be headwinds to economic growth. This is due to persistent global geopolitical tensions, uncertainty around trade policies and weakening investment spending in the domestic private sector.
In November, Kenya’s Central Bank lowered its CBR from 9 percent to 8.5 percent. The move was aimed at unlocking credit to the private sector after the economy slowed down during the second quarter – it grew at a rate of 5.6 percent as against 6.4 percent growth in the same period in 2018.
Meanwhile, Rwanda’s Monetary Policy Committee (MPC) in August decided to retain the benchmark lending rate at 5 percent with a similar objective of enhancing credit to the private sector.
In addition, the Bank of Tanzania (BoT) in June slashed its CRR – the proportion of deposits that banks are required to hold with the regulator as reserves – from 8 percent to 7 percent with a view to increase the amount of money that banks can lend to the private sector, and thus stimulate economic growth.
According to World Bank projections, average gross domestic product growth in EAC countries is expected to decline to 5.9 percent this year from 6 percent last year based on the turbulent conditions in global markets.
Experts say the rapid deterioration in global conditions is a huge risk to EAC’s economic growth prospects, leading to a significant shift in policy by central banks and MPCs.
“I believe it is because of… the concerns about the global economic slowdown attributed to factors such as trade wars,” tax and legal leader at Deloitte East Africa, Fred Omondi told The EastAfrican. “The Monetary Policy Committees (MPC) hope that the reduced rates will spur better economic growth.”
But it is not just the region’s central banks using monetary easing to support the economy, the trend is a global one.
Interest rates in major economies have been reduced in recent months as officials try to manage the risks that come with tariff actions in the trade war between the United States and China, Britain’s exit from the European Union (EU) and several other geopolitical issues.
The U.S. Federal Reserve in October slashed interest rates for the third time in four months, a move meant to boost the economy which grew by just 1.9 percent in the third quarter of 2019. This came on the back of earlier cuts in lending rates by the European Central Bank (ECB) and its counterpart in Turkey.
Although targeted at stimulating the economy, increasing the money supply by lowering interest rates sometimes comes with adverse effects such as inflation, which is already an issue across East Africa.
There are also concerns the current uncertainties may result in increased volatility in the global financial markets even though central banks in major advanced economies have adopted monetary policies to support growth.
Forecasts estimate global growth will be lower at 3.2 percent for 2019 and 3.5 percent for 2020, a 0.1 percentage point downward revision from April 2019 forecasts. Meanwhile, it remains to be seen if the measures by EAC banks are enough to spur spending and boost economic growth in the region.
