Why is the BCC interest rate increase won’t change anything?

The Central Bank of Congo (BCC) has increased its prime rate to 14% p.a. from 7% p.a in order to curb the inflation that has reached 29,42% as of January the 13^th , according to the same BCC.

In a “normal” economy, this increase would impact the inflation by reducing spendings/investments due to higher borrowing rates and increasing savings leading to less cash in circulation. This increase should also have a positive impact on the currency, as placements would become more attractive…

Well, this won’t work in the DRC, and it never did, for several reasons…

First, the BCC rate has almost no impact on the rate commercial banks are offering to their customers. Indeed, 85-90% of banks’ loans portfolios are in US dollars. Therefore, this increase will only impact loans in CDF that barely represent 10% of the total loans disbursed in the economy. The main problem here is that commercial banks are not indebted to the BCC… 

Secondly, there is almost no financial instrument in CDF except from the BCC T-Bills.  With an interest rate of 14% p.a., the maximum yield one can expect for a 7 days maturity T-Bill (the only maturity offered currently) is 14% p.a. With an inflation rate of 29,41%, the real interest rate is negative, therefore not attractive.

Finally, the weakness of the local currency is playing a major role here. Indeed, the main part of the inflation is “imported” due to the fact that the country is importing almost everything that it is consuming. Therefore, the weaker the CDF, the higher the inflation. As a result, even if people wanted to keep their savings in CDF (which is not the case), they will tend to keep them in hard currencies such as the USD to maintain their purchasing power. This is a vicious circle, the weaker the CDF, the higher the inflation, the higher the demand for foreign currencies leading to a further decrease of the CDF…

For all those reasons, the monetary policy of the BCC is simply impotent…

One recent measure taken by the BCC may actually improve the situation. Indeed, the BCC has increased the rates of the mandatory reserves for banks on current and saving accounts in foreign currencies from 10 to 13%. This measure has helped withdrawing more than CDF 150 billion ($125 million) from the economy. Several banks had to borrow CDF on the interbank market or at the BCC. In the long run, this may oblige some banks to sell their foreign currencies to respect this regulatory requirement. This could reduce the pressure on the CDF… just a little bit…