It is Time for the Bank of Central African State (BEAC) to Switch to Inflation Targeting?

Key Highlights

• Inflation in Cameroon is falling but remains well above the CEMAC convergence threshold of 3%.
• The central bank raised the policy rate by 25 basis points to 4.75% in December, bringing it back to the February 2025 level.
• Monetary policy should target an explicit inflation target as its primary objective to support price stability and reinforce monetary policy credibility.
• Fiscal policy should focus on addressing the structural drivers of inflation, such as poor road networks, fuel & transport prices, climate change, and low crop yield.

Introduction

On December 15, 2025, the Bank of Central African States (BEAC) tightened its monetary policy by raising its key interest rates by around 25 basis points: the tender rate was raised to 4.75% in order to support the CFA franc against erosion of the zone’s foreign reserves. The decision was explicitly motivated by the desire to ease pressure on the balance of payments and rebuild reserves that were considered to be below prudent thresholds.

From a macroeconomic perspective, the situation in Cameroon explains why this decision is both understandable and risky. Cameroon is experiencing moderate growth of around 3.5% in 2024, with projections close to 3.8–3.9% for 2025–2026. Inflation, although declining after recent peaks, remains around 4–4.5%. These indicators reflect a fragile recovery, exposed to external shocks, commodity volatility, and persistently low CEMAC reserves. The Bank of Central African States decided to put interest rates back up to levels last seen in February 2025 to support the FCFA, preserve external reserves, and prevent inflation from rising significantly.

Figure 1: BEAC Raises Rates Again to 4.75%

Source: BEAC & Authors

Is an Interest Rate Hike Justified?

One of the BEAC’s stated objectives is to contain imported inflation; as such, a moderate rise in interest rates may help stabilize prices in the medium term. On the other hand, the immediate effect is a contraction in domestic demand, characterized by lower household consumption, reduced revenues for small traders, and narrower margins for informal actors. However, the informal sector accounts for a very significant share of employment and income; an unaccompanied restrictive monetary policy therefore penalizes the most vulnerable and can exacerbate inequalities.

“Inflation in 2025 has stayed well above the CEMAC threshold of 3% and so the interest rate hike is justified. However, inflation targeting will help the central bank better manage inflation, while fiscal policy should focus on addressing structural drivers of inflation, such as improving road transport networks and fiscal incentives to boost domestic production of food crops like beans, rice, tomatoes, plantain, etc”.

Figure 2: Inflation is falling, but was above 3% for most of the year

Source:

What will happen to competitiveness and Foreign Direct Investment?

It should be noted that, at first glance, higher rates increase the cost of domestic capital, which can undermine the attractiveness of domestic and foreign private investment. Nevertheless, monetary stability and a credible external framework are also catalysts for confidence among medium/long-term investors. It should not be forgotten that while raising rates restores external credibility and prevents depreciation or an inflationary spiral, it can, at the cost of a difficult adjustment, create a climate conducive to more substantial and sustainable investment flows. The challenge for Cameroon is therefore to ensure that the victory of monetary stability does not become a defeat for short-term investment momentum.

The current situation highlights the limitations of monetary policy in addressing deep-rooted structural problems. Cameroon’s economy remains undiversified, heavily dependent on imports, and constrained by infrastructure limitations. In this context, monetary policy addresses the symptoms but not the root causes of economic vulnerability. Ultimately, the BEAC’s effectiveness will depend on the ability of member states to carry out coordinated structural reforms and strengthen local financial markets. It is time to move to inflation targeting.

It is Time to Change the Monetary Policy Framework

Many countries across the world are using inflation targeting, but not Cameroon. Inflation targeting is a type of monetary policy strategy where the central bank commits to a specific numeric inflation rate (often around 2-3%) over the medium term, using tools like interest rates to anchor price stability, boost transparency, and guide economic expectations for sustainable growth. With inflation targeting, the central bank’s primary goal becomes price stability, and it allows the central bank leeway to adjust interest rates and manage inflation rather than just reacting to current inflation.

The central bank should have raised rates earlier in the year, as it was clear that inflation was well above the 2% target. It is instead raising interest rates as inflation is falling, in part to support domestic spending, which is noble, but does not exactly improve the credibility of monetary policy.

“It is preferable for the central bank to have an explicit inflation target to ensure that it can guide inflation towards the CEMAC threshold of 3%. We should target inflation and not money supply, because the link between money supply and inflation is not always clear – especially in developing countries. “

1.     The FCFA Franc is also pegged to the Euro, giving it an added layer of credibility.

As the currency is pegged to the Euro, it prevents substantial depreciations and promotes macroeconomic stability.  No, I am not saying we should stay pegged to the Euro forever, but we should leverage the peg to transition to a monetary policy regime that will help contain inflation and spur action from policy makers to address the structural causes of inflation. There is plenty of research that shows the Euro peg is good for macroeconomic stability, allowing us the

2.     Fiscal Policy Should Address the Root Causes of High Food Prices

Monetary policy alone cannot tame inflation over the long run. Maybe it has elsewhere, but monetary policy does not work in isolation. This is why it is imperative for fiscal policy to play a more activist role, as some problems cannot be solved by monetary policy alone.

“Monetary policy cannot solve low crop yield and food insecurity, but targeted investments in infrastructure and fiscal incentives can encourage production and reduce food spoilage – thereby supporting lower food prices. At present, a mix of bad roads, food spoilage, high fuel and transport cost, and low crop yield has pushed prices higher – keeping inflation well above 3% for most of 2025.”

3.     It’s time to de-dollarize the Cameroonian economy

Going forward, the central bank and regulators should encourage banks, financial institutions, and traders to trade using other currencies. The EU is Cameroon’s target trading partner, followed by China. There is no reason why we should continue to increase the financial and banking sector ruin by continuing to use the dollar. The Central Bank should work with local banks to leverage the Pan-African Payment and Settlement System (PAPSS). This will ensure that African trade is cleared in African currencies, reducing banking sector vulnerability and the incidence of currency crises. Using non-dollar currencies makes macroeconomic sense, but we will continue to worry about FX reserves until 2090. It’s time to take bold steps to diversify payment systems in Cameroon.

Policy recommendations

1.     All commercial banks and the central bank should join the Pan-African payment and Settlement System (PAPSS) so that Africans can start invoicing trade in African currencies – reducing FX volatility linked to dwindling reserves and/or banking crisis.

2.     The central bank should target a 3% inflation rate as its primary objective because it can still reduce the number of notes in circulation if it wants to lower inflation by increasing interest rates, as it has. A specific target will create more trust in the monetary policy framework, leaving the central bank to benefit from the Euro Peg.

3.     Fiscal policy should address crop yield, infrastructure, and transportation cost to ensure that food can leave rural areas to urban centers on time without35-45% getting spoiled on the road to shop shelves. Remember that close to 80% of food consumed in urban centers comes from distant rural areas.

Conclusion

Cameroon needs a monetary policy framework that targets an explicit inflation target of 3% (Agreed at the central African level already). The bank can use other tools, like repo market operations, to manage money supply and credit more effectively. Over 98% of central banks across the world that have stable inflation or returned inflation to target after periods of overshoot use inflation targeting. We shouldn’t overthink it for ten years, nor wait for the French Central Bank to kindly suggest before we do it.

Henri Kouam is the Founder and Executive Director of the Cameroon Economic Policy Institute (CEPI), the most quoted think tank across Cameroon media with verifiable policy wins across trade & climate policy. He was previously the Deputy Managing Director at Prima Finance and Investment and has a license from the regulator to manage Microfinance institutions in Cameroon.