BEAC’s Strategic Monetary Tightening Curbs Inflation in CEMAC
The Central African Economic and Monetary Community (CEMAC) has been facing significant economic challenges, particularly with inflationary pressures that have threatened the financial stability and purchasing power within the region. The Bank of Central African States (BEAC), which serves as the central bank for the six nations within CEMAC, has taken a proactive stance in addressing these challenges through the tightening of monetary policy.
Inflation, the rate at which the general level of prices for goods and services is rising, can erode the value of currency and diminish consumer purchasing power. For CEMAC, a region heavily reliant on oil revenues, the volatility of global oil prices has historically been a significant factor in economic stability. The recent global economic events, including the fallout from Russia’s war in Ukraine, have further complicated the economic landscape for CEMAC countries.
To combat rising inflation, BEAC implemented a series of measures aimed at tightening monetary policy. This included increasing the policy rate three times in less than a year, a move designed to respond to inflationary pressures and support reserve levels. By making borrowing more expensive, the BEAC aimed to reduce the amount of money in circulation, which in turn, is intended to lower inflation.
The BEAC also reinforced its liquidity management framework, scaling back weekly liquidity injections and discontinuing long-term liquidity operations. This normalization of monetary policy is a step towards returning to pre-pandemic economic measures and is indicative of a broader strategy to stabilize the region’s economy.
The impact of these policies has been notable. The IMF reports that the positive terms-of-trade shock, amidst the global challenges, has broadly benefited CEMAC, reinforcing its external position and aiding in a gradual post-pandemic recovery. Moreover, the regional inflation rate, which spiked to 6.7 percent at the end of 2022, showed signs of deceleration in the second quarter of 2023.
The coordination between monetary policy tightening and structural reforms has been crucial. The IMF suggests that maintaining such a strategy is vital for laying the foundations for a more diversified, inclusive, and sustainable growth. This includes efforts to enforce foreign exchange regulations and the advancement of the reform agenda, which are essential for economic diversification and resilience.
The CEMAC’s experience highlights the importance of a robust and responsive monetary policy framework in managing inflation and maintaining economic stability. The BEAC’s actions serve as a case study for other central banks facing similar inflationary challenges, demonstrating the effectiveness of policy rate adjustments and liquidity management in achieving macroeconomic objectives.
The Monetary Policy Committee of the Bank of Central African States (BEAC) announced on June 24 the maintenance of its key rates for the fifth time in a row, to fight inflation in the Cemac zone. Thus, the interest rate for tenders remains at 5% and that of the marginal loan facility at 6.75%. Yet another status quo adopted in light of economic and financial developments marked at the sub-regional level by: “rather favourable macroeconomic achievements; an outdoor position that is always comfortable; and an inflation rate that is still high but falling,” underlines the Beac.
Tap liquidity to stabilize prices
Needless to say, in a globalized sub-regional market economy, the central bank tends to function like a thermostat: it regulates the system to prevent it from overheating or operating under speed. The last two years are a textbook case. Indeed, the control of persistent inflationary pressures within the zone has led to a tightening of the Beac’s monetary policy. The interest rate for calls for tenders was thus increased twice, for example, from 3.5% to 4% in March 2022 and to 4.5% in September 2022. Then stabilizing at 5% from March 2023.
At the same time, the central bank implemented a reform aimed at draining the excess liquidity lying dormant in the Community banking system to reduce the component of inflation which would come from the currency. This manoeuvre consisted of making liquidity more expensive for commercial banks, with repercussions on the cost of bank credit and, as a knock-on effect, limiting economic agents’ access to these credits. “Initially, it was a question of tapping liquidity to lower the money supply in circulation, while increasing key rates to guarantee price stability,” explains the governor of the Beac, the Central African Yvon Sana Bangui.
The delicate balance between inflation and growth
This monetary austerity policy made it possible to curb inflation, bringing it to an annual average of 3.9% at the end of 2024, compared to 5.6% in 2023, according to Beac’s outlook. This suggests that liquidity-tapping operations are gradually bearing fruit. As a result, the issuing institute has put the brakes on it in recent months. In addition to the objective of fighting inflation, there is the ambition to have strong economic growth which is announced to increase to 3.3% in 2024 compared to 2.3% a year later. early.
In this balancing act, the Beac changed its approach by reinjecting liquidity into the banking circuit of this community which brings together Cameroon, Chad, the Central African Republic, Gabon, Congo and Equatorial Guinea. “This exercise maintains the governor of the Beac, is based on simulations with hypotheses and macroeconomic data which allowed the central bank to resume, two weeks ago, operations to re-inject liquidity into the circuit Banking of the Community”. Thus, the first operation took place on June 11 and involved the injection of 120 billion CFA francs into the banking circuit. An operation more or less shunned by the banks which only captured 45% of the envelope, or 55 billion CFA francs.
The Beac, however, had more success during the second operation, relating to the injection of 65 billion CFA francs into the banking system, seven days later. The results of this operation revealed that the demand expressed by the banks reached 292 billion CFA francs, representing more than 449% of the envelope proposed by the Beac which, moreover, is already considering a new reform. “The Monetary Policy Committee is currently working on the development of a new strategy which will be implemented shortly,” promises Yvon Sana Bangui.
