Africa's Rate-Cut Cycle Begins

Africa's monetary pivot in 2026 is not a celebration of victory over inflation. It is a controlled retreat from constraint as central banks begin cautious rate cuts. Disinflation in food, fuel, and freight provides room to ease, while growth concerns make prolonged tightness politically and economically costly. Yet currency stability, external financing conditions, and capital flow risk impose tighter limits than in advanced economies. The easing cycle begins from restrictive territory, not neutral. The room to move is quantifiable, and it is narrow.

According to the African Development Bank, average real GDP growth for the continent is projected at 4.2 percent for 2025 and 4.3 percent for 2026, representing a 0.3 percentage point upgrade from May 2025 forecasts. The positive outlook is underpinned by buoyant private consumption spending, accommodative monetary policy, a weaker US dollar aiding disinflation, and stronger growth among key trading partners. Inflation is projected to average 13.7 percent in 2025 and 10.3 percent in 2026, with 35 countries expected to see inflation below 5 percent in both years, supported by strengthening domestic currencies, improved weather conditions, and easing food and fuel prices.

---

The Tightening That Preceded

The central bank has now raised borrowing costs by 1,525 basis points since its tightening cycle began in May 2022 to tame inflation that quickened for an 18th consecutive month to 34.2 percent in June 2024, according to Bloomberg reporting. Fitch Solutions believes the November 2024 hike marked the end of the Central Bank of Nigeria's tightening cycle, which totalled 1,600 basis points over two and a half years. Governor Olayemi Cardoso stated that monetary policy committee members reiterated their commitment to price stability as the bedrock of a thriving Nigerian economy.

The easing cycle begins from restrictive territory, not neutral. South Africa has delivered 75 basis points of cuts with inflation at 3.0 percent and a real rate cushion of 450 basis points. Nigeria cut 50 basis points with inflation at 24.48 percent (rebased from 34.80 percent) and a real rate of approximately 300 basis points. The arithmetic suggests South Africa has 200 to 300 basis points of room before hitting neutral, while Nigeria has perhaps 100 basis points before currency markets react. Constraint is not ideological. It is mathematical.

---

Why Cuts Are Finally Possible

South Africa's Reserve Bank cut its policy rate to 7.50 percent by December 2024 as inflation fell to 3.0 percent, anchoring it within its 3 to 6 percent target band, according to Finance in Africa analysis of central bank data. Headline inflation in 2024 averaged 4.4 percent. The stability of the rand and tapering oil prices supported the move. Similarly, Kenya reduced its Monetary Policy Rate to 10.75 percent in February 2025, reflecting improved economic conditions. The Central Bank of Kenya noted that inflation in January 2025 increased to 3.3 percent from 3.0 percent recorded in December 2024. Core inflation reduced to 2.0 percent in January 2025 from 2.2 percent in December 2024.

Nigeria's policymakers delivered a 50 basis point cut in September 2024, the first in five years, signaling a policy shift away from one of the most aggressive tightening cycles in the central bank's history. The reduction came after five months of easing inflation. The naira strengthened to an eight month high of ₦1,476.8 per dollar as of September 29, supported by improved reserves and better market liquidity, according to Finance in Africa.

Angola's annual inflation slowed sharply to 17.4 percent in October from 18.2 percent a month earlier. Precious Dube and Sam Singh-Jami, Rand Merchant Bank analysts, noted this reinforces their outlook for more aggressive rate cuts by the Banco Nacional de Angola over the next 12 months. Another 50 basis point reduction was expected at a recent meeting, bringing the policy rate to 18.5 percent.

---

The Monetary Landscape: Extremes Persist

As of late 2024 and early 2025, Zimbabwe, Nigeria, Malawi, Ghana, and Egypt rank among Africa's most restrictive monetary regimes, according to Finance in Africa analysis of central bank data. Beyond policy rates, several countries have leaned on prudential tools such as high reserve requirements to absorb excess liquidity. Nigeria maintains the world's highest Cash Reserve Ratio at 45 percent for deposit money banks, raised to 50 percent in September 2024, and 16 percent for merchant banks.

---

Food Prices: The Hidden Constraint

The Central Bank of Kenya noted that non-core inflation added an extra 1.9 percent, increasing to 7.1 percent in January 2025 from 5.2 percent in December 2024. This was due to the increase in the price of food stemming from seasonal changes. The transmission is mechanical. When maize prices rise 15 percent in a single month and households allocate over 50 percent of income to food in many African economies, real wages compress immediately. Central banks face political pressure to ease even when core inflation signals restraint. The result is that policy credibility trades against immediate relief, with currency markets adjudicating the balance.

According to S&P Global analysis, food purchases account for the largest component of household expenses across most African economies, in some cases more than 50 percent of the total consumer basket. Prices for food imports such as corn, wheat, and rice are 10 to 15 percent below recent highs. The price of crude oil is averaging nearly 15 percent lower in 2025 than in 2024. Considering the strong correlation between energy prices and food prices due to transportation and fertilizer costs, lower energy prices should further reduce food inflation.

Nigeria's policymakers will weigh the effects of floods in the northeast of the country and a 45 percent increase in gasoline costs on prices as they make rate decisions. Inflation remains in double digits for half of the sub-Saharan Africa countries, and currency weakness will keep those with single digit rates from easing, according to Yvonne Mhango, Africa economist.

---

Why Easing Is Slower Than Elsewhere

Tanzania's central bank is expected to hold rates because of the inflationary impact of ongoing currency weakness. Its shilling has depreciated almost 4 percent against the dollar since June because of greenback shortages. Geopolitical risks that threaten to destabilize inflation expectations also prompt caution among the continent's central bankers, said Jibran Qureshi, head of African research at Standard Bank Group. Freight costs spiked due to ships rerouting around Africa because of attacks by Houthi militants on vessels in the Bab El-Mandeb strait, part of the passage from the Indian Ocean to the Suez Canal.

---

Credit Relief Emerges, Cautiously

Private sector credit is projected to grow to about 9 percent in 2025 in South Africa, while the credit to GDP ratio is anticipated to rise from approximately 76 percent in 2024 to 80 percent, according to S&P Global. Lower inflation, interest rate cuts, and access to retirement funds under the new two pot retirement system will boost households' disposable incomes, improving their ability to service debt and reduce non-performing loans in the sector.

Kenya's private sector credit stock had dipped to KSh 3.78 trillion by mid-2024 before rebounding sharply as monetary easing filtered through the banking system. The Central Bank of Kenya attributed the improvement to declining lending rates and stronger credit appetite as liquidity conditions eased. Average commercial bank lending rates fell to 15.1 percent in September from 17.2 percent in November 2024, following eight consecutive Central Bank Rate cuts, the longest easing streak in Kenya's recent history.

In Nigeria, the stock of domestic credit is just 14 percent of GDP. Credit to the private sector grew by 19 percent in 2022, matching the rate of inflation, meaning real credit growth was close to zero. In 2023, however, private sector credit grew by 45 percent following a sharp acceleration in the second half of 2023, together with rapid growth in the money supply, according to the European Investment Bank's Banking in Africa Survey 2024. As of March 2024, private sector credit was growing at 66 percent year over year, despite fresh monetary tightening.

---

What Easing Delivers, What It Cannot

The rate cuts deliver three things. First, modest relief on domestic borrowing costs for governments rolling over local currency debt. Interest payments now consume 27.5 percent of government revenue across Africa, up from 19 percent in 2019, according to the African Development Bank. Lower rates reduce the fiscal burden at the margin. Second, reduced pressure on households and firms servicing variable rate loans. In South Africa, S&P Global expects the banking sector's credit loss ratio to normalize, averaging 90 basis points in 2025, from an estimated 100 basis points in 2024. Third, a signal that the worst of the inflation shock has passed, which can anchor expectations even when actual cuts are small.

They do not deliver three other things. First, relief on hard currency debt, which remains priced in dollars at global rates plus country risk. Africa's public debt increased by nearly 170 percent to over $1.8 trillion between 2010 and 2024, according to the African Development Bank. Debt composition has shifted away from concessional lending toward external commercial sources, non-Paris Club creditors, and domestic borrowing. Second, immunity from external shocks, whether food price spikes or currency depreciation from capital outflows. Third, sufficient stimulus to close output gaps in economies where structural constraints bind more than cyclical conditions.

Malawi, Africa's poorest economy, maintains a 26 percent rate, locked into a restrictive position by mounting debt and a severe currency crisis that has undermined investor confidence. Public debt reached an estimated 88 percent of gross domestic product by end-2024, according to Finance in Africa. While tight monetary conditions have helped moderate inflation in some economies, they have also constrained credit expansion and slowed output in key productive sectors.

---

Growth Impact: Modest but Meaningful

The African Development Bank's November 2025 Macroeconomic Performance and Outlook Update Report projects Africa will grow by 4.2 percent in 2025 and 4.3 percent in 2026, representing 0.3 percentage points higher than the May 2025 African Economic Outlook projections. The positive growth outlook is underpinned by buoyant private consumption spending, accommodative monetary policy, a weaker US dollar which is aiding disinflation, and stronger growth among key trading partners.

Regional growth varies significantly. East Africa leads with a projected 5.9 percent growth in 2025 to 2026, driven by resilience in Ethiopia, Rwanda, and Tanzania, according to the African Development Bank. West Africa maintains solid 4.3 percent growth, driven by new oil and gas production coming onstream in Senegal and Niger. In contrast, Central Africa's growth is projected to slow to 3.2 percent and Southern Africa will grow at only 2.2 percent, with South Africa, the region's largest economy, expected to achieve only 0.8 percent growth.

The IMF projects that GDP growth rates in most African economies over 2025 to 2026 will average close to 3.8 percent, similar to the post-COVID-19 period between 2021 and 2024. Economic growth in Sub-Saharan Africa is expected to reach 3.5 percent in 2025 and further accelerate to 4.3 percent in 2026 to 2027, according to the World Bank. This growth is mainly due to increased private consumption and investments as inflation cools down and currencies stabilize. The median inflation rate in the region declined from 7.1 percent in 2023 to 4.5 percent in 2024.

However, growth is still not strong enough to significantly reduce poverty and meet people's aspirations, the World Bank notes. Real income per capita in 2025 is expected to be approximately 2 percent below its most recent peak in 2015. The pace of credit expansion surges where easing is most aggressive, but transmission to GDP growth remains constrained by structural bottlenecks in infrastructure, energy, and trade finance.

---

The Path Forward

Ghana and Kenya have enjoyed favorable macroeconomic releases of late, including benign inflation, according to Jacques Nel, head of Africa Macro at Oxford Economics. The Ghanaian central bank will be eager to support the country's economic recovery, while an easing in cost of living pressures will be welcomed in Kenya. Nel expects further loosening across the board, with rate cuts likely to extend into 2026, particularly in Kenya, Ghana, and Nigeria.

Yet the easing is calibrated. Central banks deliver 25 to 50 basis point cuts, not jumbo reductions. Real rates remain positive. Currency stability takes precedence. External financing conditions constrain how far and how fast rates can fall. Africa's easing cycle seeks stability first, growth second, and buys time rather than certainty. Early cuts signal direction rather than abundance, delivering modest relief while preserving macro credibility. The room to ease exists. The room to ease aggressively does not.