High inflation limits CBN’s scope for easing, for now - Capital Economics
Africa Economics

High inflation limits CBN’s scope for easing, for now

Africa Economics Update
Written by Virag Forizs

The recent rise in inflation appears to have stayed the hand of Nigeria’s central bank from delivering more monetary easing at today’s MPC meeting. But, as price pressures drop back towards the end of this year, we think that policymakers will lower the benchmark rate by 150bp to 10.00%.

 

Global State of Play, 28th January, 0800 GMT and 1600 GMT

In the first of our regular briefings of the year, Group Chief Economist Neil Shearing will lead a discussion about the economic impact of vaccination programmes, another US fiscal stimulus package and fresh lockdowns in China.

  • The recent rise in inflation appears to have stayed the hand of Nigeria’s central bank from delivering more monetary easing at today’s MPC meeting. But, as price pressures drop back towards the end of this year, we think that policymakers will lower the benchmark rate by 150bp to 10.00%.
  • Policymakers at the Central Bank of Nigeria (CBN) kept their benchmark rate unchanged at 11.50% at today’s MPC meeting. The decision was in line with the consensus collected by Bloomberg and our own forecast. This was the second consecutive MPC meeting where policy settings have been left unchanged, following 200bps of cumulative cuts since the onset of the pandemic.
  • Governor Godwin Emefiele’s statement pointed to some concern about elevated inflation. The headline rate shot up to 15.8% y/y in December, the highest since late 2017, as price pressures rose in all major price categories. (See Chart 1.) But policymakers appear to be optimistic that inflation will drop back as pandemic-induced disruptions subside, reducing their inclination to tighten monetary policy.
  • The CBN appears in no rush to take action to curb high inflation and its focus seems to be shifting towards providing as much support to the economy as possible. A recent surge in daily new COVID-19 cases (see Chart 2) has darkened the near-term outlook. The government has not imposed more stringent containment measures, but precautionary behaviour seems to have increased; high-frequency data on visits to retail and recreation outlets point to a drop off in activity. (See Chart 3.) The key oil sector is perking up only very slowly due to a gradual relaxation of the country’s OPEC+ quotas.
  • Looking ahead, we think that inflation will drop back towards the end of 2021 and that the rebound in economic activity will be sluggish. As inflation eases, probably in the middle of the year, we suspect that the balance on the MPC will tilt in favour of providing more support to the struggling economy. We have pencilled in an additional 150bp of rate cuts in the second half of 2021. (See Chart 4.)

Chart 1: Consumer Prices (% y/y)

Chart 2: Daily New COVID-19 Cases
(7-day moving average)

Chart 3: Retail & Recreation Visits (Google Mobility Data, % Relative to 3rd Jan-6th Feb, 7d avg.)

Chart 4: Policy Interest Rate (%)

Sources: NBS, CBN, Google, Refinitiv, Capital Economics


Virág Fórizs, Africa Economist, virag.forizs@capitaleconomics.com