BCEAO could soon increase its key interest rates for the fifth time since June 2022
Tuesday, 09 May 2023 17:08 
(Togo First) - This could strongly impact regional financial markets and mirrors a global trend of monetary tightening by Central Banks.
The Central Bank of West African States (BCEAO) might increase its key interest rates at the upcoming monetary policy meeting, scheduled for June 2023, according to information from Agence Ecofin. This would be the fifth consecutive time within a year that the Bank will raise its rates, mirroring a global trend of monetary tightening among major central banks such as the European Central Bank (ECB) and the US Federal Reserve (Fed).
Between June 2022 and now, the BCEAO has raised its key interest rates four times. Through this, the apex lender aimed to control inflation, safeguard foreign exchange reserves and stabilize economic growth. The latest hike was in March when the Bank increased its refinancing rate to 3%.
Despite inflation decreasing for four consecutive months, it steadied in March 2023 reaching 5.7%, far above the BCEAO's target of 3%. Analysts believe raising the key interest rates more would send a strong signal to the market, indicating the Central Bank's commitment to controlling inflation and maintaining financial stability. This could bolster investor confidence in the regional economy and potentially impact the equity market, favoring bond investments and other less risky financial assets.
However, this monetary adjustment also suggests the BCEAO is not convinced that the recent downward inflation trend will continue, and it fears a long-term increase. More tightening could be seen as "overconfidence" in the WAEMU’s economy. According to the IMF, the latter is expected to grow at 6% this year compared to 5.5% in 2022. Last February, the BCEAO predicted that the WAEMU’s real GDP would stand at 5.1% and 5.3%, in Q1 and Q2 2023, respectively. In Q4 2022, the figure stood at 5.4%.
It's worth noting that previous increments in key interest rates led to higher bond yields and a liquidity crisis in the sovereign bond market. However, the situation stabilized in April, thanks to a measure allowing banks to buy their sovereign shareholders' securities in large quantities. The average coverage level for issues rose to 157.10% last week (first week of May) from less than 100% throughout March. It was already at 132% in the last week of April, reflecting a growing appetite among investors for public securities.
A new increase in key interest rates might be welcomed by investors looking for attractive returns in the bond market. But for the region's States, already cut off from international financial markets, the challenges posed by a rise in the cost of regional financing would only grow. This could impact the financing of budget deficits. The net financing needs of governments are estimated at over 4,300 billion FCFA (about $7.2 billion) this year.
On the other hand, states like Benin, which have managed to keep inflation within the BCEAO's target range, find themselves bearing the brunt of the increased key interest rates and the resultant rise in the costs of regional financing.
Fiacre E. Kakpo
