Central Banks Likely to Cut Rates as Dollar Soars
Central banks across Africa are preparing to lower interest rates over the coming weeks, but the decision to ease policy is being complicated by the political shift in the United States. Monetary authorities in the region are cautious, fearing that the window for cutting rates may close once President-elect Trump formally assumes office. The looming policy changes in Washington are expected to further strengthen the dollar, presenting a difficult trade-off for African nations.
The incoming administration’s commitment to raising tariffs on imported goods is anticipated to act as a primary driver for a stronger dollar. During his campaign, Trump proposed increasing tariffs by an additional 10 percent on most foreign products, with goods from China potentially facing tariffs as high as 60 percent or more. This shift in trade policy is already influencing financial markets, as the “Trump Trade” has pushed 10-year Treasury yields up by 0.16 percent to 4.44 percent. The dollar index, which measures the dollar’s performance against a basket of major currencies, saw its largest single-day increase since November 2022.
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This strengthening of the dollar is not merely a market reaction; it signals a broader reflationary approach. Thys Louw, an emerging market fixed income portfolio manager at Ninety One, noted that the initial market reaction reveals an expected policy mix to comprise more expansionary fiscal policy, reduced government regulation, and increasingly aggressive trade policy. For African nations, this dynamic creates a challenging environment where the benefits of domestic rate cuts may be negated by external economic pressures.
While domestic factors ultimately influence their decisions, it will be challenging for central banks to ignore the impact of Trump’s election victory. “Trump’s stated policies, such as an increase in tariffs and larger budget deficit for the US, are likely to be inflationary and set to put a damper on the ability of African central banks to cut interest rates in 2025,” said EY Africa Chief Economist Angelika Goliger. A stronger US dollar will negatively impact African countries by increasing the cost of their imports and making dollar-denominated debts more expensive. Rising US interest rates could also lead to a withdrawal of capital from emerging markets, compelling local monetary authorities to raise borrowing costs to steady their currencies.
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Capital Markets and Debt Challenges
Highly indebted African countries are particularly worried about the potential impact of new tariffs. This concern is acute for nations that are currently blocked from raising capital in global financial markets due to their heavy debt burdens. Countries like Zambia, Ethiopia, Ghana, and Kenya face significant hurdles in accessing international financing.
