The continued weakening of the naira is stoking inflation in Nigeria, says economists at Goldman Sachs who are seeking more than a mere 100 basis points rate rise by the Monetary Policy Committee which is expected to announce key decisions Tuesday after a two-day meeting.
According to a story by Bloomberg, there has been little or no slowing in inflation in Africa’s largest economy and the MPC would need to make a significant rate move to move the needle on inflation.
Andrew Natheny, economist at Goldman says, “Nigeria would need to do something much bigger, much bolder, much more decisive if the central bank wants to arrest inflation and change the mindset of foreign investors. Another 50 or a 100 basis points is certainly not going to move the needle in the eyes of an investor,” Matheny said.
“Developments since the last meeting have definitely been hawkish; inflation has not really slowed at all,” noted the Goldman Sachs Group Inc. economist. “Most importantly, the naira has weakened once again. And that’s obviously inflationary. So all of that points to the CBN staying on the hawkish side.”
Inflation quickened to 34.2% last month from 34% in May and the naira has slumped almost 6% against the dollar since mid-June, prompting the central bank to sell dollars to local foreign exchange bureaus to ease the domestic scarcity of the US currency.
Many economists believe the Central Bank is poised to raise interest rates one last time to support the naira and throttle inflation that’s near a three-decade high, before ending its aggressive tightening campaign.
Read also: Nigeria’s long battle against inflation continues as MPC decides
The median estimate of six economists in a Bloomberg survey is for the 12-member monetary policy committee led by Governor Olayemi Cardoso to raise interest rates by 75 basis points to 27%. The decision will be announced on Tuesday at 2 p.m. in the capital, Abuja.
Analysts also urged the central bank to implement a more concrete strategy to address persistent naira weakness. This “should be articulated and demonstrated with the CBN being a more consistent and active participant in the foreign exchange market,” said James Marshall, senior portfolio manager of Promeritum Investment Management LLP.
Still, analysts anticipate a hike on Tuesday will bring to an end the MPC’s tightening cycle that started in May 2022 and has led to rates being lifted by 14.75 percentage points.
“In order to cement inflation’s slowdown and hasten the restoration of positive real rates, the central bank will likely implement one final rate hike in July,” said Yvonne Mhango, Bloomberg Africa economist.
That’s because inflation is expected to slow from July, helped by favourable comparisons with 12 months ago and measures to reduce the cost of food, including the introduction of a 180-day window to import wheat and corn duty-free.
They also project the naira will stabilize at its current level, aided by expected dollar inflows, easing inflationary pressures
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