Inflation Stable, Interest Rates To Hold

BMI View : As we expected, the West African central bank elected to hold its key interest rate at 3.0% at its monetary policy meeting on September 5. With inflation remaining relatively subdued and 2012 economic growth expected at around 5.9%, we hold our view that rates will remain unchanged at the bank's next meeting. While new data paints a mixed picture, BMI holds the view that inflation in the 8-member union's inland states could pick up in the short term, diverging from the larger coastal economies.

The Dakar-based Banque Centrale des Etats Ouest-Africaine (BCEAO) has held its key interest rate at 3.0%, confirming BMI's expectation that a change of monetary policy is unlikely this year. The bank justified its decision by pointing to moderate inflation and relatively robust growth across the 8-nation Union Economique et Monetaire Ouest-Africaine (UEMOA, which is sometimes referred to by its English acronym WAEMU). We believe that growth will stay high and inflation in the union's key coastal economies will remain subdued, though we note the danger of higher food inflation in the bloc's inland states.

Rolling Along Nicely
UEMOA - CPI (M-O-M Change)

While inflation across the union rose by .34% on a month-on-month (m-o-m) basis in June (up from .28% a month earlier), this remained well within the bank's tolerance. Inflation slowed in three of the six countries reporting June figures, with the sharpest decline occurring in Niger. Senegal was the only state to see price growth accelerate substantially, with m-o-m CPI jumping from -1.2% in May to 0.0% in June and 0.5% in July. Even Senegal's figures, however, compare favourably with other African states; June CPI growth came in at 1.2% in Nigeria and 1.39% in Ghana on a m-o-m basis.

BMI expects that the UEMOA economy will grow by 5.9% in 2012, bouncing back after the bloc's meagre 0.38% expansion in 2011. The recovery of Côte d'Ivoire, which represents 31.9% of the union's economy and where we are predicting strong growth of 8.1%, is the key driver of this forecast, which is slightly more bullish than the BCEAO's own prediction of 5.3% growth. In the context of stable inflation and solid economic growth, we are maintaining our view that an interest rate change is unlikely at the BCEAO's next policy meeting (see July 6 'Rates To Hold For Now' on our online service).

A Bad Wind From The North?

As we have mentioned before, there is a risk that inflation in UEMOA's smaller, inland economies could diverge from that in the larger, coastal states due to the food crisis currently underway in the arid Sahel region ( see July 27 'High Inflation To Persist Until Harvest'). Almost 20 million people face food shortages across the sub-region, where a poor harvest has been complicated by massive population displacements caused by unrest in Mali.

UEMOA - Food Prices M-o-M Change

New data, however, suggests that these fears were misplaced. Food price growth slowed in Niger, and actually fell in Mali. BMI believes that there are two reasons for this surprising outcome. The first is that official data is often collected in national capitals, where aid is first distributed and far from the outlying regions where the crisis is felt most harshly. Data was also not available for food crisis-hit Burkina Faso, where we suspect prices are rising. Secondly, we believe that these figures indicate that short-term emergency policies enacted across the region (including tax cuts on staple foods) are having a greater-than-anticipated effect. Even if, however, these policies are unable to contain rising prices in the lead up to the October harvest, we doubt that this will necessitate a monetary policy response.

UEMOA's Germany
UEMOA - Côte d'Ivoire & Union Real GDP Growth

The reason why our monetary policy forecast is relatively immune to higher inflation in Niger, Mali, or Burkina Faso is that we expect that the central bank will cater first and foremost to the needs of the Ivoirien economy, tolerating higher inflation in the inland states rather than choke off growth in the union's economic core. Inflation in Côte d'Ivoire is highly correlated with inflation in the bloc as a whole, and growth in the country has a huge impact on its neighbours. As we are anticipating strong growth and low inflation in Côte d'Ivoire, we expect that a shift in monetary policy is unlikely.