Despite strong economic growth, inflation continues to climb in the West African Economic and Monetary Union (WAEMU), leading the bank to maintain its current rates. While central banks like the U.S. Federal Reserve and the European Central Bank (ECB) are considering lowering rates, BCEAO is taking a wait-and-see approach, hoping for relief by 2025. However, external shocks, regional insecurity, and unpredictable weather may complicate matters.

Yesterday, the BCEAO’s Monetary Policy Committee decided to leave its main refinancing rate—the rate at which it lends to commercial banks—at 3.50%. The marginal lending facility rate, which represents the cost for banks to borrow short-term funds from BCEAO in times of urgent liquidity needs, remains at 5.50%. These rates have been unchanged since December 2023.

"In the second quarter of 2024, inflation hit 4.1%, surpassing our target range of 1 to 3%. What’s worrying is that this increase is part of a consistent trend. In December, inflation was at 2.3%, by March it rose to 2.9%, and in June it reached 4.1%. By July, it climbed even further to 4.4%," BCEAO noted. This steady inflation rise is one reason why the bank is holding its rates, unlike the ECB and the Federal Reserve, which are leaning toward rate cuts.

BCEAO Governor Jean-Claude Kassi Brou explained that the inflation surge is linked to a less favorable 2023/2024 agricultural season, supply chain disruptions caused by regional security issues, and higher prices for imported food products. "Several factors are driving this inflation," he added, referring to logistical challenges (such as border closures) and rising global food and energy prices.

Despite improvements in the region’s external situation—especially foreign exchange reserves, thanks to better trade terms and more external funding secured by member states—the Monetary Policy Committee hinted that rates are unlikely to change before the first quarter of 2025. Economic growth is still robust: despite rising prices, WAEMU’s real GDP grew by 5.3% in the second quarter of 2024, with most economic sectors contributing positively. For the year, WAEMU’s growth is projected at 5.9%.

Still, inflation remains a major issue. Forecasts expect the inflation rate to hit 3.7% in 2024, similar to 2023 levels, before hopefully returning to the target range of 1% to 3% by 2025. This outlook depends on a better 2024/2025 agricultural season, a drop in global food prices, and efforts to tackle rising costs of living. But with heavy rains causing damage across the Sahel, this scenario remains fragile.

One outcome of these high-interest rates is that bond yields on the Union’s sovereign debt remain above 7%, with some yields reaching 9%, and in countries like Niger, even 10%. This raises concerns about the market’s ability to meet the needs of governments and the economy. Additionally, banks no longer borrow at the 3.5% refinancing rate but closer to 5.5%, the marginal lending facility rate. This higher cost is passed on to new loans, as banks adjust their margins to cover the cost of raising funds.