Sankore: Fed rate cuts may not impact investment in Africa

Victor Aluyi, the Head of Investment at Sankore Global Investment, recently shared his insights on the potential impact of the US Federal Reserve's 50 basis points interest rate cut on investment in Africa. Aluyi believes that while the rate cut may not have a strong immediate impact on investment in Africa, the rate path in the near term will be crucial in determining its effects. He noted that the current US interest rates, even after the cut, remain relatively high, making investment returns in the US still attractive. Aluyi highlighted that significant flows to Africa and other emerging or frontier markets typically occur when US interest rates are very low, as was the case during the last rate cut cycle in response to the US-China trade war and the COVID-19 pandemic. During that period, interest rates in the US had hit zero, making investment returns in emerging markets more appealing. Aluyi emphasized that the Fed's recent rate cut is part of its efforts to fulfill its dual mandate of price stability and full employment, with a current focus on boosting employment. He shared that the Fed has expressed confidence in the sustainability of inflation on its path to the 2% target, leading to a concentration on the labor market to maintain resilience. Regarding the global impact of the US rate cut, Aluyi suggested that the world is transitioning into a global easing cycle after years of tightening monetary policies in major economies. He highlighted the recent decisions by central banks like the ECB and the Bank of England to either hold rates steady or implement rate cuts as indicators of this shift towards accommodative monetary policies globally. In terms of the implications for decision-making in Nigeria and West Africa, Aluyi acknowledged that it is still early to gauge the full effects but pointed out that if US rates stabilize at around 2.5% to 3%, the incentive to move capital from the US to African markets may not be significant. He compared this scenario to the influx of funds seen during the COVID-19 pandemic when US interest rates were at zero. However, he expressed skepticism about rates returning to such lows in the current economic environment. When asked about the likelihood of US rates reaching zero, Aluyi deemed the chances very low, citing significant changes in inflation dynamics post-COVID that make a return to zero interest rates improbable. He underlined the differences between the current rate-cutting cycle and previous adjustments, noting that the current conditions, including a resilient labor market and high inflation, differ from past economic concerns that prompted rate adjustments. In conclusion, Aluyi emphasized that while the recent US rate cut may not immediately drive significant capital flows to Africa, the trajectory of interest rates in the US will be crucial in determining future investment trends. He suggested that a global easing cycle is underway, with central banks worldwide likely to adopt more accommodative monetary policies in the coming period.