African central banks are maintaining relatively tight monetary policies to contain inflation, support currencies and attract foreign capital, even as high borrowing costs threaten to constrain credit and economic activity, according to economist Dumebi Oluwole.
The policy outlook remains complicated by divergent inflation trends across the continent and external pressures, particularly elevated oil prices linked to the Iran war, Oluwole, Economist (Africa and EMEA), told DNE Africa.
“Higher for longer” remains the prevailing approach, she said, as policymakers seek to keep interest rates sufficiently elevated to bring inflation towards target without placing excessive pressure on economic growth.
Figures cited by Oluwole show Egypt’s policy rate at 19%, compared with inflation of 12.8%, while Nigeria’s rate stands at 23%, against inflation of 14.63%. Ghana’s policy rate is 14%, compared with inflation of 5.2%.
These positive real interest rates can make bonds and other fixed-income assets attractive to foreign investors, supporting capital inflows and helping stabilise exchange rates.
However, the effectiveness of monetary policy varies between countries and depends partly on how quickly changes in central-bank rates are reflected in commercial lending rates.
Kenya illustrates the challenge. The Central Bank of Kenya (CBK) reduced its policy rate from 13% in August 2024 to 8.75% by February 2026, a decline of 4.25 percentage points.
Average commercial bank lending rates fell more slowly, from 17.2% to approximately 14.7% over a similar period.
The central bank has introduced a new loan-pricing model to strengthen the transmission of monetary policy to borrowers.
In markets where this transmission remains weak, businesses and households may continue to face expensive credit even after central banks begin easing policy.
Oluwole warned that keeping interest rates high for extended periods can limit private-sector borrowing. Nevertheless, business activity has proved resilient in some economies.
Nigeria’s purchasing managers’ index (PMI) rose to 56.4 in September, its highest level since February 2022, indicating continued expansion in private-sector activity.
Temporary measures to reduce operating costs have also helped businesses in some markets. Kenya, for example, has used subsidies and a temporary reduction in value-added tax on fuel to ease pressure on companies and consumers.
The picture is less encouraging elsewhere. Egypt’s PMI remained below the 50-point threshold separating expansion from contraction, at 47.2 in September, while South Africa’s manufacturing PMI fell to 45.8 in August.
Rwanda presents a further challenge for policymakers. Despite three interest-rate increases, inflation has continued to run well ahead of its 8.75% policy rate, reflecting significant energy-price increases and pressure from a weaker currency.
The differing experiences underline the limits of a uniform approach to monetary policy across African economies.
While interest rates can help contain demand-driven inflation and support currencies, external shocks and domestic structural weaknesses can weaken their effectiveness.
In Nigeria, for instance, inflation is also affected by insecurity, inadequate food-storage facilities and weak transport networks, alongside fuel costs. These factors cannot be addressed through monetary tightening alone.
Oluwole said African governments must coordinate fiscal and monetary policies, address structural sources of inflation and improve the transmission of policy-rate changes to commercial lending.
The challenge for central banks is to preserve progress in controlling inflation without prolonging the squeeze on credit, investment and household purchasing power.
