Nigeria: Central Bank puts its money where its mouth is

Nigeria’s self-proclaimed move to a more “flexible” exchange rate last month was initially a disappointment, with the Central Bank of Nigeria reasserting its grip at N282/US$. Over the last week, however, the bank has belatedly allowed the currency to move more freely, prompting a swift fall to about N318/US$. The weaker currency will eventually help to reduce strains in Nigeria’s balance of payments. But over the short term it will push up inflation, which was already far above target (headline inflation reached 16.5% y/y in June). The central bank responded by hiking its key policy rate from 14.00% to 16.00%, but we doubt that this will succeed in either supporting the currency or limiting inflation. We expect that the bank will be forced to hike rates further over the course of this year, adding to the pressure on the struggling economy. While Q2 GDP figures are not yet available, we believe that the economy contracted last quarter, thus pushing Africa’s largest economy into a technical recession.