Analysts are betting that the Central Bank of Nigeria (CBN) will cling to the interest rate despite a surge in inflation fueled by an exchange rate crisis..
They opined that there will be no need for tightening since there is an appreciable inflow of foreign exchange compared to the last time when the rates were hiked. In addition, the Federal Government (FG) search for FX in the international market through debt funding will complement the monetary side.
“I think the CBN will hold rates steady. Even though a slight tick up in October, the month-on-month trend shows that the rate of inflation is cooling,” said Pabina Yinkere Head, Research Division
Vetiva Capital Management Limited.“This should pave way for lower inflation come February 2017, largely influenced by a high base effect. I believe the MPC will have this at the back of their minds and vote to keep rates on hold,” said Pabina.
In September, the Monetary Policy Committee (MPC) of the central bank held the rate at 14 percent to the dismay of some analysts that called for a hike that would underpin a battered currency and attract more investment.
Bashir Saheed, head of research at Meristem Securities Limited he believes the MPC will rather wait for the fiscal authority’s drive for FX in the international market through debt to fund the budget which are all gathering appreciable momentum.
“We believe a successful outing by the FG will bode well to stabilise Naira and bring some relief to the domestic economy and real sector.This will in turn moderate inflation rate and also pave way for recovery from the current economic recession,” said Saheed.
Nigeria’s consumer inflation rate climbed to 18.30 percent in October, from 17.9 percent in September, according to the National Bureau of Statistics (NBS). Prices rose 0.8 percent from the previous month.
Inflation has been accelerating in Africa’s most populous nation as a result of a sharp drop in oil price since mid 2014 that saw the external reserve received one or two punches.
In order to protect the depleting reserves and stabilize the naira, the central bank pegged the naira at N197-N199 for 15 months, a policy that was calamitous in the sense that it fuelled a monstrous dollar scarcity.
Recently, Bureau De Change (BDC) operators have been harassed by security operatives on the instruction by the Abuja based bank that they should not sell above N400/$. The command and rule policy analysts say will further fuel illiquidity in the market as the gap between the parallel market and the interbank rate widens.
The naira weakened 0.16 percent to N305 per dollar by 10:19 a.m. in the commercial capital, Lagos. The currency trades at N470 the parallel markets.
Nigeria’s economy shrank by 2.10 percent in the second quarter of the year, according to the NBS. The International Monetary Fund (IMF) forecast GDP will shrink by 1.70 percent by this year, the worst recession in 25 years.
Nigeria’s external reserves fell by 2.8 percent to $23.94 billion as at October 27, 2016, compared with the $24.615 billion it was as at September 27, 2016, as attacks of oil installations continues in the Niger Delta region.
Capital importation into the country for the third quarter was $1.82 billion, 34 percent lower than the corresponding period.
John Ashbourne, an economist at Capital Economics Ltd in London, however, said the October inflation number will put yet more pressure on the central bank to tighten monetary policy.
“We expect that the bank will hike its key policy rate from 14 percent to 16 percent at its meeting next week,” said Ashbourne.