From Growth to Stability: IMF Analyzes Monetary Policy Stance in Sub-Saharan Africa

The International Monetary Fund’s African Department, in collaboration with researchers Johanna Tiedemann, Olivier Bizimana, and Shant Arzoumanian, has released a new working paper that attempts to decode one of the most elusive questions in Sub-Saharan African economic management: what constitutes a neutral monetary policy stance. For decades, central banks in emerging and frontier African markets have set policy interest rates with limited clarity on whether these decisions were genuinely stimulative, restrictive, or simply neutral. The challenge has become even more pressing after the inflation surge of 2021–2023, which forced many central banks to raise rates sharply, raising concerns over whether growth was being sacrificed at the altar of stability.

The Search for the Elusive Neutral Rate

At the heart of this debate lies the neutral real interest rate, often called r-star, defined as the rate consistent with output at potential and inflation at target. Because this rate cannot be directly observed, the authors used six distinct approaches, ranging from simple averages to complex semi-structural models adapted for open economies. Their analysis covered the period from 2002 to 2023 across eleven economies, including Ghana, Kenya, Nigeria, South Africa, Zambia, Mauritius, Mozambique, Tanzania, and Uganda, as well as the West African and Central African monetary unions. The findings reveal that in three-quarters of these countries, neutral rates peaked in the mid-2000s, fell during the global financial crisis, and dropped further during the pandemic. While Sub-Saharan Africa continues to post higher neutral rates than advanced economies, the trajectory has mirrored the global downward drift. Mauritius even recorded negative neutral rates by 2023, while Ghana and Mozambique still registered rates above six percent. South Africa, meanwhile, has steadily converged toward advanced-economy levels.

A Patchwork of Policy Responses

These differing neutral rates translated into highly varied policy stances across the region. By comparing real policy rates with neutral levels, the authors observed that countries facing the same global shock often moved in opposite directions. During the global financial crisis, seven countries loosened monetary policy while four others tightened. The commodity slump of 2014–15 produced similar splits, with some central banks raising rates to protect currencies while others opted to maintain looser positions to sustain growth. The pandemic brought broad consensus around accommodation, but by the end of 2023, the picture was once again fragmented. Kenya, South Africa, and Zambia had shifted into restrictive territory, while Ghana, Uganda, and others maintained accommodative stances despite lingering inflationary pressures. This divergence underscores how fragile and context-dependent policy calibration remains in the region.

Beyond Rates: The Role of Financial Conditions

Recognizing that weak financial markets and shallow transmission channels make policy rates less effective in Africa than elsewhere, the paper moves beyond interest rates to construct Financial Conditions Indices for each country. These indices aggregate data on interest rates, yields, credit flows, exchange rates, and global risk indicators, painting a more holistic picture of financial systems. The results reveal that the correlation between interest rate gaps and financial conditions is generally weak, except in cases of extreme monetary positions. Where policies were very tight or very loose, the relationship was clearer. Importantly, the correlation was significantly stronger in countries with inflation-targeting regimes, reaching about 0.6 in some cases, pointing to the benefits of institutional reforms that sharpen policy credibility and transmission.

The authors further strengthened their findings by isolating exogenous monetary policy shocks and testing their impact on financial conditions through local projection techniques. These exercises confirmed that contractionary shocks tend to tighten financial conditions, but the speed and persistence of the effect vary widely. South Africa, Mauritius, and Kenya showed relatively strong and sustained responses, while Tanzania and Nigeria exhibited weaker or short-lived impacts. In the West and Central African monetary unions, effects were eventually strong but came with long delays. Once again, inflation-targeting regimes delivered more predictable outcomes, reinforcing their emerging role as a stabilizing anchor for monetary policy in the region.

Balancing Stability and Growth Amid Global Shocks

The study also explores the trade-offs faced by policymakers during crises. During demand-driven shocks, such as the global financial crisis or the COVID-19 pandemic, most central banks prioritized growth stabilization, cutting rates even as inflation risks lingered. By contrast, during supply-driven shocks such as the surge in global commodity prices following Russia’s invasion of Ukraine, authorities favored price stability, responding with aggressive rate hikes. Ghana stood out for its steep increases, reflecting the heavy toll of currency depreciation and inflationary pressures. The divide between commodity exporters and financially integrated economies on one side, and countries with pegged exchange rates on the other, was stark. Pegged economies tended to adjust cautiously, while exporters and open markets bore the brunt of volatility.

The authors conclude that assessing monetary stance in Sub-Saharan Africa requires a dual lens: neutral rate estimates provide a useful benchmark, but financial conditions must also be taken into account in economies where policy transmission remains incomplete. Inflation-targeting frameworks, although relatively new in the region, have proven their worth by delivering stronger and more consistent results, suggesting that deepening such frameworks alongside financial market reforms would strengthen policy effectiveness. Looking ahead, the paper calls for further research into how shocks propagate through specific channels such as lending, credit, and exchange rates, and how these ultimately shape economic performance.

By offering one of the first comprehensive empirical explorations of the neutral rate in Sub-Saharan Africa, the IMF study does more than fill a technical gap. It gives policymakers a clearer compass to navigate an increasingly turbulent global environment, while also situating Africa more firmly in the global conversation on monetary policy, stability, and growth.