Red Sea, Suez Canal Crisis Fuels Fresh Wave of Rate Hikes in East Africa

SUNDAY MARCH 17 2024

Malta flagged ship calls at the Port of Mombasa

Recent attacks on ships in and near the Red Sea by Yemen’s Houthi rebels have affected some of the world’s top shipping and oil companies. PHOTO | FILE | NMG

By JAMES ANYANZWA

East African central banks are facing a fresh wave of rate hikes to contain inflationary pressures emanating from surging shipping and insurance costs for vessels diverting from the Suez Canal as a result of the Middle East conflict which continues to disrupt the flow of goods through the Red Sea.

The Bank of Uganda (BoU) recently convened a Monetary Policy Committee (MPC) meeting that increased its policy rate by 50 basis points to 10 percent to deal with the new inflation threats.

This signals likely rate hikes in Kenya and Tanzania, whose 15 percent and 10 percent, respectively, of foreign trade goes through the Egyptian waterway, according to data by the United Nations Conference on Trade and Development (Unctad).

“Risks to the inflation outlook remain highly dependent on the global and domestic environment. Specifically, higher global commodity prices, partly due to geopolitical tensions and an increase in shipping costs resulting from the Middle East conflict as well as tighter global financial market conditions could result in higher domestic inflation,” BoU’s deputy governor Michael Atingi-Ego said in a statement dated March 6.

“MPC assessed the risks and the uncertainties of the outlook as being broadly on the upside. The risks to the inflation outlook are elevated and this requires a tighter monetary policy stance.”

The BoU had maintained the policy rate at 9.5 percent in February 6, based on an economic assessment that showed inflationary pressures were getting subdued as a result of diminishing supply-side shocks, declining global inflation and tight monetary and fiscal policies.

But there are concerns that the on-going war in Palestine and disruptions in the Red Sea will put pressure on food and energy prices, adding to the existing threats linked to the war in Ukraine.

“Risks to the inflation outlook remain highly subject to changes in global commodity prices and global financial markets developments. Instability in the Middle East is creating new supply chain disruptions and the threat of higher oil prices,” Atingi-Ego had said in the monetary policy statement for February.

Uganda’s headline and core inflation rose to 3.4 percent in February, from 2.8 percent, and 2.4 percent in January.

The National Bank of Rwanda (NBR), which is expected to review its policy stance in May, cautioned that several potential risks, including the Red Sea crisis, could affect the inflation outlook.

Potential risks

“Several potential risks could affect this outlook, including geopolitical tensions such as the ongoing wars in Ukraine and in the Middle East,” said John Rwangombwa, the central bank governor.

“Disruptions in the Red Sea may influence international commodity prices and weather-related challenges that could affect future agriculture sector performance.”

The NBR held its policy rate stead on February 21 for three months with hopes that inflation for 2024 would remain within the band of two to eight percent, averaging close to five percent.

The Central Bank of Kenya is expected to review its monetary policy stance, taking into consideration the new inflation threats in April 3.

In February, the CBK surprised the market with a 50-basis point increase in the policy rate to 13 percent from 12.5 percent, the largest rate hike in 12 years, citing a need to anchor inflationary expectations and set the general prices of goods and services on a downward trajectory.

“The risks to inflation remain elevated in the near term, reflecting the impact of second-round effects of the rise in fuel inflation, and pass-through effects of exchange rate depreciation,” said CBK Governor Dr Kamau Thugge.

A January 15-19 survey by the CBK shows that Kenyans are worried about the potential impact of global geopolitical tensions, which may undermine supply chains and contribute to further increases in oil prices.

Kenya’s overall inflation declined to 6.3 percent in February from 6.9 percent in January 2024, the weakest rate since March 2022, driven by slower increase in prices for food and non-alcoholic beverages.

Change in policy implementation

The Bank of Tanzania‘s Monetary Policy Committee met on January 18, the first-ever meeting in which the banking regulator began implementing monetary policy using interest rates and set its main interest rate at 5.5 percent.

The team said that the transition from monetary targeting to an interest rate (or price)-based monetary policy framework is a significant milestone in monetary policy transformation in the country.

“The MPC’s decision on the CBR rate considered the need to contain inflation within the medium-term target of five percent, while supporting economic growth to reach 5.5 percent or more in 2024 and ensuring the stability of the exchange rate,” said BoT.

The on-going security crisis in the Suez Canal has seen shipments through the waterway drop by 42 percent in January and February,as oil tankers rerouted round the Cape of Good Hope, a much longer distance, which is potentially causing delayed deliveries, increased costs and further fueling inflationary pressures.

“Practically, no liquefied natural gas-carrying vessels are using the Suez Canal at present, as all have been diverted away from the Red Sea,” said Unctad.

The military conflict between Israel and the Hamas-led Palestinian militant groups in Gaza has increased insecurity in the Red Sea, an inlet lying between Africa and Asia. This has forced ships to seek alternative but longer and expensive routes away from the Suez, a 193.30km canal in Egypt that connects the Mediterranean Sea to the Red Sea.

About 15 percent of Kenya’s foreign trade by volume is channelled through the Suez, comprising 12 percent of exports and above 15 percent for imports.

Tanzania’s foreign trade volumes through the Suez Canal comprise eight percent of exports and 11 percent of imports, according to the report.

In February, container tonnage crossing the Suez Canal fell 82 percent, with 621 container ships rerouted through the Cape of Good Hope.

The extra distance and days translate into additional costs such as fuel and lost value of time-sensitive cargo.