Nigeria to hold-off on rate cut for sixth successive time

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria starts its bi-monthly meeting today, and analysts are forecasting that the apex bank would hold off on cutting the benchmark Monetary Policy Rate for a sixth consecutive time.

This is unlike South-Africa, which vies with Nigeria as Africa’s largest economy, which cut borrowing costs for the first time in five years, as inflation eases and the South African Reserve Bank (SARB) sees the need for a monetary stimulus after the economy slipped into recession this year. The rand fell 1.2 percent, but pared losses and gained 0.6 percent on Friday.

Nigeria has also seen a steady decline in headline inflation rate in the last five months, even as it spars on another end with its first recession in 25 years. But the latter may be unable to toe the path of South-Africa, whose benchmark interest rate, despite a 25 basis point reduction to 6.75 percent last Thursday, remains above inflation rate and offers investors real interest rate.

“Nigeria offers negative returns of around 200 basis points and a rate cut at this time may worsen the country’s economic situation and erase recent exchange rate gains,” said Tajudeen Ibrahim, head of research at Lagos-based investment bank, Chapel Hill Denham.

“The tight liquidity management by the CBN has been able to put a lid on currency speculation, but a rate cut may send the naira back to square one; just look at how the rand has fared since the surprise move by the SARB to cut the policy rate,” Ibrahim said by phone.

Nigeria left its benchmark interest rate unchanged at 14 percent for a fifth consecutive meeting in May, to balance lifting the economy- which contracted 0.5 percent in the first three months of 2017- with fighting inflation that’s at almost double the government’s target.

Godwin Emefiele, the CBN governor, said at the last meeting, that tight monetary policy will continue, despite decelerating inflation and a fifth consecutive quarter of economic contraction.

“Price pressures continue and loosening interest rate would exacerbate them, while tightening would portray the bank as insensitive to concerns about growth,” Emefiele said, after announcing that nine of 10 MPC members had voted to keep borrowing costs unchanged, while one favoured reducing the rate.

Twenty out of twenty-three economists polled in a BusinessDay survey, predict a rate hold, ahead of Tuesday’s announcement. Two expect a rate cut and one predicts a hike.

Nigeria’s headline inflation has slowed for five successive months now, printing at 16.1 percent in June, according to state-funded statistics agency, the National Bureau of Statistics (NBS). This is 200 basis points above the country’s benchmark interest rate and 700 basis points above the upper end of the CBN’s target band of between 6-9 percent.

In the case of South Africa, inflation cooled to 5.1 percent in June, which is well within the SARB’s preferred target band of between 3-6 percent and 60 basis points lower than its policy rate of 6.75 percent.

That makes a case for a rate cut in South Africa, but negates one for Nigeria, analysts say.

“When a country is in recession and inflation is not a problem, a case can be made for a rate cut, but in Nigeria, that is not the case and it mirrors the dilemma the CBN has witnessed in the last one year, as they scramble to tame high inflation in a period of weak economic growth,” said Ayodeji Ebo, managing director at Lagos-based financial advisory firm, Afrinvest Securities Limited.

“I expect the CBN will leave rates unchanged,” Ebo said by phone.

Bismarck Rewane, an economist and CEO of the Financial Derivatives Company, also expects the CBN “to err on the side of caution and leave rates unchanged,” Rewane said, in an interview with BusinessDay.

“I am not expecting any dramatic change,” Rewane said, ahead of a CNBC session today in Lagos, to discuss the likely move of the CBN and its implications.

Finance minister, Kemi Adeosun, who has bemoaned the impact of high interest rates on government borrowing, has championed a rate cut.

Many have also joined Adeosun in criticising the high interest rate environment, pointing to the negative impact it has on private sector lending in a time of recession.

“Unlike the South African case, a CBN rate cut would not be data-dependent; albeit they both face political pressure,” said Rafiq Raji, chief economist at Lagos-based Macroafricaintel, an Africa focused macro research and investment consultancy.

Consumer prices surged after the Central Bank removed a N197-N199 peg against the dollar in June 2016, causing the naira to lose more than 40 percent of its value, even as a shortage of foreign currency made the import of everything from fuel to food more expensive.

“There is still concern about month-on-month rise in inflation,” said Razia Khan, head of Africa macro research at Standard Chartered Plc in London.

“There is concern that easing now would weaken the real rate of interest, and weaken the foreign-exchange rate,” Khan said in an emailed note last month.

Month-on-month inflation rose 1.6 percent in June. The rate of growth, however slowed 30 basis points, compared to 1.9 percent in May.

The NBS said food inflation, which rose 19.9 percent, continued to mount pressure on prices.

With the harvest season close, prices are likely to ease, according to Pabina Yinkere, head of institutional business at Lagos-based Vetiva Capital.

 

LOLADE AKINMURELE