Nigeria may hike policy rate to 12.5% in 2022 on slowing inflation – Rencap

A more secure growth recovery and slowing inflation would give Nigeria scope for a one percentage point (1-ppt) policy rate hike to 12.5 percent in 2022, Renaissance Capital, an emerging and frontier markets-focused investment bank, said in a note on Monday.

The investment bank, which has its headquarter in Moscow, Russia, believes the policy rate hike would help to contain inflation, which it sees in the lower double digits; and to contain a depreciating naira.

Already, the firm noted that some African central banks have started to tighten their monetary policy before the growth recovery becomes entrenched.

In November 2021, Ghana and Zambia hiked their policy rates by 1 ppt and 50 bpts, respectively, to 14.5 percent and 9.0 percent, while Nigeria and Kenya kept theirs at 11.5 percent and 7.0 percent.

“We expect inflation to soften in Nigeria, Egypt, Ghana and Zambia, and to pick up in Kenya and Rwanda in 2022. We forecast rate hikes in Nigeria and Zambia where there are deeply negative real rates, and think the risk is skewed to the upside for Kenya and Ghana,” Yvonne Mhango, economist for Sub-Saharan Africa at Renaissance Capital, said.

Read Also: Nigeria’s central bank holds monetary policy rate at 11.5% amid recession

Renaissance Capital forecasts headline inflation of 14.5 percent and 12.4 percent at the end of 2021 and 2022, respectively, which implies the 6-9 percent inflation target will remain elusive for at least the short term.

While it forecasts a policy rate hike in 2022, the investment bank expects treasury yields to remain flat, with upside risk from an increase in the government’s domestic borrowing.

“We think there is upside risk to our 2022 inflation forecast from: insecurity (overall conflict across northern Nigeria, disrupting the on-going harvest for millions of households, according to Famine Early Warning Systems Network (FEWS NET); FX depreciation (we see the I&E window FX rate at N482/$1 at YE22); high transport costs; a below average harvest; and the high cost of imported food,” Mhango said in the note seen by BusinessDay.

Nigeria’s Monetary Policy Committee (MPC) left its policy rate at 11.5 percent on November 23, 2021, its last meeting of the year.

Nigeria’s central bank has kept the Monetary Policy Rate (MPR) at 11.5 percent since September 2020, from 13.5 percent, to improve the flow of credit to households and businesses.

Encouragingly, year-on-year (YoY) headline inflation slowed for the seventh consecutive month to 16.0 percent in October, albeit slowly, after peaking at 18.2 percent in March. This is being led by food inflation which slowed on the back of the ongoing September-to-December harvest. However, imported food price inflation remains elevated.

Godwin Emefiele, governor of the Central Bank of Nigeria (CBN) says the near-term outlook of the Nigerian economy is brightening significantly, with improvements projected into the short- and the medium-term.

Nigeria’s output growth rate is projected to remain positive from 4.03 percent in the third quarter of 2021 to nearly 2.91 percent in the fourth of 2021, implying a total growth of about 3.10 percent for 2021.

The IMF and the World Bank project real growth rates of 2.6 percent and 2.4 percent, respectively while the estimate by Nigeria’s ministry of finance and national planning stands at 3.0 percent. Generally, real GDP growth rate is projected to remain robust and strengthen within the short-term, regardless of the imminent vulnerabilities.