For months Nigeria’s monetary authorities kept money rates low but with inflation galloping at a fast pace and an early exit from economic contraction, the era of cheap money in Africa’s largest economy could be about to end, economists say.
Last week, GT Bank became the first top tier bank to make the move. GT Bank sent a not-so-loving valentine eve message to its customers announcing a two per cent increase in the cost of personal loans, from 19% to 21%. It is the clearest sign yet that even top lenders are gearing to move rates at a time Nigeria is hoping to truly embed the culture of consumer banking into its arsenal for growing wealth and boosting consumer spending for a traumatised population.
Nigeria’s annual inflation rate climbed for a 17th straight month to 16.47% in January of 2021. It was the highest inflation rate since April of 2017, as food inflation hit an over 12-year high of 20.57% linked to pandemic disruptions and dollar shortages as well as lingering restrictions on imports of certain food items despite the reopening of the country’s borders.
The CEO of Financial Derivatives Bismarck Rewane has for months hinted that the cost of borrowing would have to go north and he hinges his forecast primarily on the back of Nigeria’s precariously high rate of inflation.
Read Also: Keystone Bank trainees donate street sweepers’ uniforms to LAWMA
According to the leading economist, “Nigeria is already in a liquidity trap. The CBN will have no choice but to raise interest rates as it prioritizes price stability over economic recovery.
“The timing of an interest rate increase will be a function of money supply growth, federal government’s overdraft, galloping inflation and exchange rate pressures,” Rewane explained.
At the weekend, Boingotlo Gasealahwe, a Bloomberg economist while commenting on Nigeria’s exit from recession which he said defied expectations, said, “we see the positive 4Q GDP print as paving the way for the Central Bank of Nigeria to resume rate hikes in order to curb the country’s rising inflation rate.”
The Central Bank had left its monetary policy rate unchanged at 11.5% during its January 2021 meeting. As the policymakers were again confronted with a policy dilemma as to whether to aggressively combat the inflationary pressure or support measures currently aimed at stimulating growth and reversing the recession.
Although the economy was then still in a stagflation environment with simultaneous occurrence of inflationary pressures and contracting output, the MPC resolved to reverse both developments and continue pursuing price stability while stimulating growth.
At its September 2020 meeting, the CBN unexpectedly slashed its monetary policy rate by 100 bps to 11.5%, bringing borrowing costs to the lowest since 2016 and it was the second rate cut of 2020 and aimed at supporting the economy that plunged 6.1% in the Q2 hit by the global pandemic.
In Nigeria, the Consumer Price Index (CPI) measures the change over time in prices of 740 goods and services consumed by people for day-to-day living. The index weights are based on expenditures of both urban and rural households in the 36 states.
It is unclear how soon the CBN will make the move on rates as the Nigerian economy continues to battle currency challenges, with FX illiquidity making it hard for businesses to import.
The multiplicity of FX rates also holds back any influx of foreign capital, with the IMF estimating a REER overvaluation of 18.5% according to its latest Article IV on Nigeria according to Tellimer.
