Nigeria’s central bank leaves key rates unchanged for third time

Faced with a contracting economy, high inflation and a rigid foreign exchange rate, Nigeria’s central bank opted to keep its key interest rate unchanged at 14 percent on Tuesday, in line with market expectations.

The Monetary Policy Committee led by Governor Godwin Emefiele has now held the policy rate at 14 percent since July, while the cash reserve ratio remained at 22.5 percent.

The liquidity ratio was also held at 30 percent.

“In consideration of the headwinds in the domestic economy and global factors, nine out of ten members voted to leave all key rates unchanged, Godwin Emefiele, the CBN governor said.

Kalu Idika Kalu, a former Nigerian finance minister, thought the MPC over-flogged global dynamics, and gave less attention to pressing domestic challenges.

In particular, the two-time minister spoke of the foreign exchange market segmentation which has knocked investor confidence.

“We should be bothered more with the interbank exchange rate and the other multiple rates in the market, as this is central to attracting foreign investment inflows and reducing the government’s cost of funds,” Idika said.

Pointing to the first decline in inflation rate in the 15 months, to 17.8 percent in February, some analysts had began to make compeling arguments for a rate cut.

However, the risk of offering investors negative real returns, the elevated pressure on the naira and the fact that inflation- though on the decline- remains outside the apex bank’s preferred band of between 6-9 percent, all made a cut in interest rate untenable, according to Emefiele.

On the back of higher crude oil prices and production, the Nigerian economy is tipped to grow by as much as 1.5 percent in 2017 by ratings agency, Standard & Poor’s, after contracting for the first time in 25 years in 2016. S&P spared Nigeria a downgrade and affirmed its B assessment, five levels below investment grade, with a stable outloook on March 17.

Emefiele is also confident that growth beckons, but at a much higher pace of 3.4 percent and he gave his reasons.

“The recently released Economic Recovery and Growth Plan, the new foreign exchange policy and the on-going efforts by the federal government to broker peace in the Niger-delta will help revive economic growth and stabilise prices,” Emefiele said.

The country’s foreign-exchange policy has become a common agenda-item for the committee as the nation maintains a managed currency float and has stopped importers of goods it deems non-essential from buying dollars on the official market.

While this has contributed to a rapid increase in consumer prices, Emefiele said on March 11 that allowing the naira to freely float will hurt the economy, which shrank by 1.5 percent last year, the first contraction since 1991.

 

“They won’t cut because inflation remains high, and they won’t hike because that will undermine growth,” Yvonne Mhango, an economist at Renaissance Capital, said in an emailed response to questions.

They will only “adjust upwards, if they allow for more flexible foreign-exchange policy that results in the naira weakening.”

Sub-Saharan Africa peers, Kenya and Angola maintained the status quo on monetary policy rates at their last Monetary Policy Committee meeting while Zambia and Uganda reduced interest rates to 14 percent and 11.5 percent respectively.

 

 

 

Lolade Akinmurele