South Africa tightens policy, others may soon follow suit

The South African Reserve Bank responded to the turmoil in EM currency markets by unexpectedly hiking interest rates this month. Rates were raised by 50bp to 5.50% and, looking ahead, we think policy is now likely to be tightened further over the coming months in an effort to shore up the rand. By contrast, with inflation remaining within target range in both Nigeria and Kenya, central banks there left interest rates on hold. Nevertheless, we expect policymakers in both countries to follow South Africa’s lead and begin tightening policy later this year. In Nigeria, there are growing concerns over the effect of loose fiscal policy on inflation. Meanwhile in Kenya, a reliance on short term inflows of capital leaves the country vulnerable to less accommodative global monetary conditions. The upshot is that we expect interest rates to rise modestly in both countries by the end of 2014.