Africa’s rate-cut cycle faces fresh threat from renewed oil shocks, El Niño

…Rising energy prices and climate-driven food supply risks threaten to reverse Africa’s inflation gains, potentially forcing central banks to slow monetary easing as borrowing costs remain high

Africa’s interest-rate cutting cycle faces a fresh threat as renewed oil-price shocks and the prospect of an intense El Niño weather event raise the risk of resurgent inflation, potentially forcing central banks to pause rate cuts or tighten monetary policy.

The twin pressures are emerging just as policymakers seek to support credit growth, investment and economic recovery after an extended period of restrictive monetary policy. Higher oil prices are increasing fuel, transport and production costs, while the threat of disrupted rainfall and agricultural output could push food prices higher across vulnerable economies.

The renewed pressure on energy markets follows a brief easing in oil prices in late August, when hopes of a phased reopening of the Strait of Hormuz and reports of mine-clearing efforts reduced some of the geopolitical risk premium. Prices subsequently climbed in September as supply disruption fears persisted and Washington and Tehran remained at an impasse.

Brent crude reached $100 a barrel in early September, rising 14.4 percent over the month to around $103.50, before climbing further to $110 a barrel by Wednesday afternoon.

For African economies heavily exposed to imported energy and food, the combination threatens to reverse the disinflation that allowed several central banks to lower borrowing costs.

“Africa’s monetary-policy cycle is becoming increasingly uneven,” Angelika Goliger, EY Africa chief economist, said in a recent report. “While earlier disinflation has created room for rate cuts in some economies, renewed energy and food-price pressures mean central banks are likely to remain cautious.”

The divergence is already visible. Nigeria, Zambia, Zimbabwe and Angola delivered substantial rate cuts last month, while South Africa and Uganda raised borrowing costs. Several other central banks have held rates steady as uncertainty over inflation has increased.

El Niño adds to Africa’s food inflation risk

The threat extends beyond energy markets. A strong El Niño event could disrupt rainfall patterns, damage agricultural production and increase food-price pressures, compounding the effects of more expensive fertiliser and fuel.

The World Meteorological Organization reported a 100 percent probability of El Niño conditions developing. The event is expected to influence global weather patterns through February 2027, increasing the risk of extreme weather in vulnerable regions.

Previous episodes demonstrate the potential human and economic costs. The 2015–2016 El Niño contributed to droughts, flooding and extreme temperatures, with more than 60 million people globally affected by associated health and food-security risks, according to the source material.

The impact across Africa is unlikely to be uniform.

Kgaugelo Mkumbeni, research officer for Climate Risk and Human Security at the Institute for Security Studies, said El Niño could bring drought to some areas while increasing flood risks in others.

“Regions such as East Africa and the Greater Horn will be directly affected. In equatorial countries like Kenya, Somalia, southern Ethiopia and Uganda, above-average October-December rainfall is expected. For Southern Africa, below-normal rainfall could occur during the October-April rainy season.”

West Africa and the Sahel could experience less predictable rainfall distribution, Mkumbeni said, with parts of Mali, Niger, Nigeria and Chad expected to receive below-normal rainfall. Central Africa faces mixed conditions.

These risks matter for monetary policy because food accounts for as much as 50 percent of consumer price indices in some African economies. Poor harvests can reduce food availability and raise prices, while higher fertiliser and transport costs increase the expense of producing and distributing what remains.

The resulting inflation can erode household purchasing power and increase pressure on wages, making it harder for central banks to bring prices under control.

The South African Reserve Bank (SARB) has warned that the energy shock is already spreading beyond fuel prices.

In its October Monetary Policy Review, the central bank said global inflation rose in the first half of 2026 as the Middle East conflict disrupted energy supplies, widened refinery margins and increased transport and production costs.

“The shock has become increasingly visible in core inflation,” the SARB said, adding that the prospects of El Niño and fertiliser constraints were increasing food-price risks.

The bank warned that policymakers must prevent price shocks from becoming entrenched.

“Policy must guard against the risk that persistent fuel, administered price and food shocks become embedded in expectations and wages,” it said, warning that this could undermine the credibility of the inflation target.

South Africa and Uganda tighten as Nigeria cuts rates

South Africa offers one of the clearest indications of how renewed inflation risks are changing monetary policy.

The SARB raised its policy rate by a cumulative 50 basis points to 7.25 percent through increases in 2026 as inflation accelerated and global supply pressures intensified.

Headline inflation rose from 3.2 percent in the first quarter to 4.5 percent in the second quarter. The central bank expects inflation to remain above five percent until the second quarter of 2027 before easing towards its target.

The concern is that higher fuel and food prices could spread into other goods and services, making inflation more persistent.

“Large and sustained shocks, like those we are experiencing now, are more likely to trigger second-round effects,” the SARB said, referring to the risk that initial price increases spread across the wider economy.

Uganda has also tightened monetary policy, although currency depreciation is an immediate concern.

The Bank of Uganda raised its benchmark rate by 225 basis points to 12 percent at an emergency meeting last week, taking borrowing costs to their highest level since 2017. Governor Michael Atingi-Ego said the shilling’s continued depreciation could fuel inflation, warranting tighter policy.

Uganda’s annual inflation rose for a sixth consecutive month to 4.6 percent in September, its highest level since June 2023.

Rwanda has also tightened policy in response to persistent price pressures. Its central bank raised the benchmark rate by 50 basis points to 8.75 percent in August, the third consecutive increase. The World Bank analysis put annual inflation at 15.9 percent in August.

Global monetary tightening compounds the pressure

African central banks are also confronting a less supportive international financial environment as major economies respond to inflation and energy-price pressures.

The Federal Reserve, the Bank of Japan and the European Central Bank have moved towards tighter monetary policy. The consequences for African economies could include higher external borrowing costs, capital outflows and additional pressure on domestic currencies.

A stronger dollar would increase the local-currency cost of servicing dollar-denominated debt. Currency depreciation could also make imported fuel, food and industrial inputs more expensive, amplifying the inflationary impact of higher global commodity prices.

“With US monetary policy still relatively restrictive following September’s first rate increase since 2023, African policymakers will be alert to exchange-rate weakness, capital outflows and imported inflation,” Goliger said. “Even where domestic inflation is easing, these pressures are likely to limit the pace of rate cuts.”

The International Monetary Fund has similarly warned central banks against easing policy prematurely.

Speaking during the IMF and World Bank Group Annual Meetings in Bangkok, managing director Kristalina Georgieva urged policymakers to maintain their focus on price stability.

“On monetary policy, we are urging central banks to stay laser-focused on their price stability mandates,” she said.

“The case for tightening is strongest where inflation remains above target and economic activity is high. Now may be a good time for a prudent hawkish bias in many countries.”

Tighter global financial conditions could also make refinancing debt more expensive for African countries with heavy debt-service burdens and substantial external financing needs.

Nigeria leads the easing bloc

Despite the renewed risks, several African central banks continued cutting rates in September as domestic conditions improved.

Nigeria reduced its monetary policy rate by 350 basis points to 23 percent. Zambia and Zimbabwe each cut rates by 250 basis points, while Angola lowered its benchmark by 100 basis points.

Together, the four countries delivered 950 basis points of rate cuts during the month.

Nigeria’s decision followed an improvement in inflation and foreign-exchange conditions, giving the Central Bank of Nigeria greater room to reduce monetary restriction after an extended period of elevated borrowing costs.

The cuts also reflect policymakers’ desire to support credit growth, investment and economic activity. However, sustained increases in global energy prices could make further easing more difficult if imported inflation accelerates or pressure on the naira intensifies.

The Central Bank of DR Congo has also eased policy, reducing its key interest rate from 25 percent to 12.5 percent between October 2025 and July 2026, according to the supplied analysis. The move was intended to make credit more affordable and support economic growth.

Elsewhere, policymakers are taking a more cautious approach.

The Central Bank of Kenya halted its easing cycle and held its policy rate at 8.75 percent amid uncertainty over global oil prices and geopolitical developments. Ghana maintained its policy rate at 14 percent, while Egypt, Morocco and Mozambique also held rates in September.

Botswana and Mauritius have similarly maintained relatively tight monetary conditions as they assess inflation and external risks.

World Bank warns inflation could rise again

The World Bank’s latest Africa Economic Update reinforces concerns that the disinflation underpinning recent rate cuts could lose momentum.

The bank projects median inflation in sub-Saharan Africa to rise from 3.7 percent in 2025 to 5.5 percent in 2026, as higher global fuel, fertiliser and food prices reverse some of the recent gains.

“Further geopolitical tensions could trigger additional increases in commodity prices, intensify inflation, and weaken external and fiscal balances,” the World Bank said.

It also warned that adverse weather shocks, persistent supply bottlenecks and a slower-than-expected easing of global financial conditions could sustain inflationary pressures and delay monetary-policy normalisation across the region.

“Overall, inflation dynamics are expected to remain closely tied to developments in global commodity markets and the evolution of geopolitical risks,” the Bank said.

The inflation threat comes even as the region’s growth outlook improves. The World Bank expects sub-Saharan Africa to grow by 4.3 percent in 2026, up from 4.1 percent in 2025, with forecasts upgraded for nearly three-quarters of countries.

But stronger growth does not necessarily give central banks more room to cut rates if energy prices, food inflation and currency pressures rise simultaneously.

The multilateral lender warned that a more hawkish Federal Reserve could tighten external financing conditions, particularly for countries with large refinancing needs, heavy debt-service burdens or substantial dollar-denominated debt.

“These pressures could be further compounded by an accompanying rally in the dollar, leading to a one-two punch of higher market interest rates and depreciated exchange rates that would raise the cost of rolling over and servicing the external debt. As a result, monetary policy paths across the region are also likely to diverge,” it added.