CURRENCIES – Naira’s dive fuels pressure for rates rise

Nigerian currency plunges to record low ahead of central bank meeting.

The Nigerian naira tumbled to a fresh record low, taking its losses against the dollar to 55 per cent over the past month and sharpening the pressure on policymakers in Africa’s largest economy to lift interest rates today.

Nigeria’s central bank finally gave in to market pressure in mid-June to scrap the naira’s 16-month-old currency peg, prompting a devaluation designed to restore investor confidence and haul the economy out of recession.

The naira plummeted more than 40 per cent against the dollar on the first day of the new currency regime, but quickly stabilised and hardly moved for three weeks, leading analysts to assume the Central Bank of Nigeria was still keeping a tight grip on the currency.

However, any semblance of stability has evaporated in recent days, as the naira fell more than 8 per cent against the dollar last week.

Yesterday, the currency dropped a further 1.6 per cent to an all-time low of N310 per dollar.

“Although the new system was described as a free float, it was very clear it wasn’t actually,” said John Ashbourne at Capital Economics.

“Weakening the naira is a potentially painful but necessary step to fixing the economy.

“Policymakers must balance what’s economically necessary with what’s politically possible.”

Nigeria has been tipped into one of its worst economic crises in more than a decade by low oil prices, which account for more than 90 per cent of Nigeria’s foreign revenue. This has been compounded by a shortage of dollars.

During the first three weeks of the new currency system, when the naira held steady, the central bank was selling $35m to $60m worth of dollars a day, according to analysts at JPMorgan.

The renewed depreciation over the past week has come as the central bank has “stepped away from the foreign exchange market for the first time since adopting the floating exchange rate model”, according to Sonja Keller and Yvette Babb, strategists at JPMorgan.

“We expect the naira to continue to test new” record lows, they said, as the “central bank seeks to reduce its supply of foreign exchange to the market”.

Fresh weakness in the currency will focus further attention on the rate-set ting meeting of the Central Bank of Nigeria, which faces a tough balancing act between quelling a rise in inflation expectations and supporting an ailing economy that contracted 0.4 per cent in the first quarter from a year ago.

Inflation leapt to 16.5 per cent in June, well above the bank’s target of 6 per cent to 9 per cent, and is widely expected to rise further in the wake of the currency devaluation as import prices surge.

JPMorgan predicts that inflation will average 18 per cent in the second half of this year, and forecasts the central bank will lift rates by 2 percentage points to 14 per cent today.

But Ashbourne at Capital Economics forecasts inflation to hit 20 per cent within a few months, but predicts the central bank will hold fire on rate rises until the autumn.

Source: FT