Nigeria will probably hold its benchmark interest rate at a record-high 14 percent for the sixth straight time when members of the Monetary Policy Committee (MPC) meet this Monday and Tuesday, with an easing cycle seen happening in the first quarter of 2018 at the earliest.
Five economists surveyed by BusinessDay expect the rate unchanged despite the trend in inflation and fragile economic growth.
Inflation slowed to 15.91 percent in October from 15.98 percent the previous month, making it the ninth straight month of decline, but still remains well above the 6-9 percent preferred band, while the country managed to exit recession in the second quarter of 2017 after expanding 0.55 percent, according to data provided by state-funded National Bureau of Statistics (NBS).
The MPC signalled at the last meeting that it would hold its guns till the first quarter of next year before reviewing the rate, as it seeks clarity on how indicators from Gross Domestic Product (GDP), budget implementation, the foreign exchange rate and inflation, will evolve.
Two MPC members, which include Doyin Salami, voted to cut the policy rate at the July meeting, while the other six who were present, including Godwin Emefiele, the CBN governor, wanted to hold.
“Since July, we have seen Nigeria’s monetary policy committee (MPC) become less hawkish. A couple of members voted to ease policy, in part to spur a recovery in YoY credit growth – which fell to -2.9 percent in August, vs 22% a year earlier,” said Yvonne Mhango, sub-Saharan Africa economist at Moscow-based Renaissance Capital.
“We believe this will complement the authorities’ efforts to lower interest rates on treasury securities, by raising the foreign debt share in public debt. The risks to our view include a fall in oil prices and/or production, which undermines the naira and compels the maintenance of a tight policy stance.”
The communique from the last meeting available on the Central Bank’s website suggest that the MPC does not anticipate significant gains on GDP growth (higher) and inflation (lower) much before Q1 2018.
Nigeria, Africa’s biggest oil producer, is struggling to raise enough revenue amid the worst economic slump in about 25 years. Gross domestic product expanded from a year earlier in the three months through June after contracting for the previous five quarters.
Acute dollar shortages that were exacerbated by capital controls last year sent investors fleeing.
The MPC has kept its key rate at a record-high 14 percent since July 2016, citing the need curb stubbornly high inflation and attract foreign investors to its debt instruments.
Arguments in favour of looser policy are that inflation is not demand driven.
“I don’t buy the idea of leaving interest rates so high in a time of economic slowdown and cost-push inflation,” said Bismarck Rewane in an earlier comment to BusinessDay.
“It would only make sense if rising inflation was demand-driven,’ Rewane said.
Demand-pull inflation is when prices surge on the back of increased consumer demand and excessive liquidity, while inflation could be cost-push when production costs spike and is passed on to the consumer through price increases.
A more than 40 percent devaluation in the naira against the dollar, as well as higher fuel costs have contributed to Nigeria’s cost-push inflation.
Rewane however expects another rate hold at this month’s meeting.
The yields on debt instruments in the fixed income space is expected to remain attractive in the near term, rate hold or not, according to Lagos-based financial advisory firm, Meristem Securities.
“However, in the medium to long term, yields are expected to flatten given expectations that inflation rate would continue to inch downwards. This may however be offset by the rising credit risk profile of the country as the debt burden becomes a sore point of reference for the economy,” Meristem analysts said in a Nov. 15 note to investors.
Meanwhile, West Africa’s second largest economy, Ghana is likely to cut rates by 1-percenatge point to 20 percent this week, following the slowdown in inflation to a year to date low of 11.6 percent year-on-year in October.