Angola Hikes Key Rate to Record High to Contain Inflation

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Angola's central bank unexpectedly increased its benchmark interest rate to a record high to curb inflation.

The monetary policy committee hiked the rate to 20% from 15.5%, Governor Jose de Lima Massano told reporters Friday in Luanda. The last time it raised the benchmark was in November 2017.

The meeting that was originally due to take place on July 29 was moved forward because of the recent “evolution of the main indicators, especially inflation,” said Massano. The rise in the rate was aimed at tempering the trajectory of price growth, he said.

“The spread between inflation and the interest rate has been growing wider since the beginning of year,” the governor said. “Current data indicates additional inflationary pressures, which may put at risk the central bank's inflation target of 19.5% for the end of the year.”

What Bloomberg Economics Says
“The still benign inflation outlook supports our expectation that the central bank will leave rates unchanged through 2021, although a better-than-expected recovery may prompt increases as early as the fourth quarter.”
--Boingotlo Gasealahwe, Africa economist
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Inflation in Luanda, the capital of Africa's second largest oil producer, was at a near four-year high of 28% in May.

The national inflation rate, while still high at 24.9%, has come down from December. The rate was at more than 40% late in 2016 and dropped below 20% in 2018, until the currency started weakening.

The decision will likely have an “impact on economic growth, but shows that the central bank is more concerned about the current inflation trajectory and in maintaining the kwanza exchange rate stability,” said Tiago Dionisio, a Lisbon-based analyst at Eaglestone Advisory SA. The International Monetary Fund expects the economy to expand 0.4% this year.

The hike also follows similar steps by other emerging market central banks, such as those in Russia and Brazil, to shift to monetary policy tightening in anticipation of developed countries doing the same. That may help avoid investors pulling their money out of riskier emerging-market assets if yields rise elsewhere, Dionisio said.

Changing Direction

The tightening comes after lawmakers on June 22 agreed to amend the Constitution to boost the central bank's independence by changing the way the governor is appointed and the mandate of the bank to focus on price stability and then financial stability.

The changes are still to be gazetted before they become law. Previously policy makers focused on money supply rather than lending rates to try curb inflation. That's because a lot of the price pressures in Angola came from rising import costs following a depreciation of the kwanza, rather than demand.

The central bank maintained its mandatory reserves level in foreign currency at 22%.

The next MPC meeting is due to take place on Sept. 27.