Nigerian monetary easing: better late than never - Capital Economics
Africa Economics

Nigerian monetary easing: better late than never

Africa Economics Update
Written by Virag Forizs

We think that today’s 100bp interest rate cut by the Nigerian central bank, to 12.50%, will be followed by further loosening as economic recovery proves weaker than the central bank expects. We have pencilled in an extra 50bp cut, most likely at the meeting in September or November.

  • We think that today’s 100bp interest rate cut by the Nigerian central bank, to 12.50%, will be followed by further loosening as economic recovery proves weaker than the central bank expects. We have pencilled in an extra 50bp cut, most likely at the meeting in September or November.
  • Today’s decision by the Central Bank of Nigeria (CBN) to lower the policy rate from 13.50% to 12.50% came as a surprise to most. We were one of only two firms in the Reuters poll that correctly anticipated a cut (although our forecast was for a more moderate 50bp cut). Most analysts expected policymakers to keep interest rates on hold. This was the first rate cut in over a year.
  • The aggressive rate cut is somewhat hard to square with Governor Godwin Emefiele’s tone in the accompanying speech. He emphasized that activity held up well in the first quarter, noting that the CBN is less pessimistic on the economy’s growth prospects this year than the IMF is (or indeed than we are). (See Chart 1.) The governor also reiterated concerns about inflation picking up in recent months due to supply chain disruptions. And previous policies of the monetary and fiscal authorities were hailed.
  • It’s difficult to attribute policymakers’ change of heart since the previous meeting in late March where they kept their policy rate unchanged. Of course, a lot has changed since then. But the CBN could have scheduled an impromptu meeting to cut interest rates as so many other EM central banks have done. It’s possible that the central bank may be more emboldened to act as strains in the balance of payments have started to ease. Oil prices edged higher from their April lows, and capital outflows have probably eased.
  • What’s more, policymakers’ disagreement on the magnitude of the rate cut suggests that more easing lies in store. Three out of ten MPC members voted for rate cuts larger than 100bp, with two opting for a 150bp cut and one backing a 200bp cut.
  • The CBN’s next steps are notoriously hard to predict. There was little in the way of guidance in Mr. Emefiele’s post-meeting press conference. In the near-term, the weaker currency is likely to push up inflation, probably preventing another rate cut over the next few months. The CBN will, at that point, probably stick to its other policies (directed lending to some sectors and the minimum loan-to-deposit ratio).
  • However, inflation should pass its peak by late Q3 and, with the economic recovery from the coronavirus likely to prove weaker than the central bank anticipates, that will probably sway policymakers to lower interest rates again in the final months of the year. (See Chart 2.) For now, we expect that the CBN will cut rates once more this year, probably to 12.00%.

Chart 1: GDP (% y/y)

Chart 2: Consumer Prices & Key Policy Rate

Sources: Refinitiv, Capital Economics

Sources: NBS, CBN, Refinitiv, Capital Economics


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