Nigerian policymakers in a bind, but easing to resume - Capital Economics
Africa Economics

Nigerian policymakers in a bind, but easing to resume

Africa Economics Update
Written by Virag Forizs

Policymakers in Nigeria kept their benchmark rate unchanged at 11.50% today, highlighting the dilemma they face due to high inflation and a weak economy. But we think that the central bank will, on balance, opt to provide more monetary stimulus in early 2021 once inflation has peaked.

  • Policymakers in Nigeria kept their benchmark rate unchanged at 11.50% today, highlighting the dilemma they face due to high inflation and a weak economy. But we think that the central bank will, on balance, opt to provide more monetary stimulus in early 2021 once inflation has peaked.
  • 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. The CBN has delivered a cumulative 200bps of cuts since the onset of the pandemic, including a 100bp cut at the last meeting in September.
  • Governor Godwin Emefiele’s statement suggested that policymakers are being pulled in different directions due to high inflation and an economy in recession. Indeed, price pressures have gradually risen since mid-2019; the headline rate jumped to 14.2% y/y in October (from 13.7% y/y in September), well above the upper bound of the CBN’s 6-9% target range.
  • Meanwhile, national accounts data showed that the economy remained very weak as GDP fell by 3.6% y/y in Q3, following a 6.1% y/y contraction in Q2. Governor Emefiele emphasised the need to rapidly escape the recession. Policymakers seem to have squared the circle by keeping policy settings unchanged.
  • We think that the economy is facing significant headwinds in Q4, and the recovery will not be as strong as the CBN’s expectation for a relatively quick recovery. The oil sector will continue to struggle under OPEC+ quotas. And disruptions from nationwide protests against police brutality in October probably dented activity at the start of Q4.
  • While daily new COVID-19 cases remain low by regional standards, there are signs of an uptick in cases. Renewed restrictions on activity to ward off a second wave may be needed before vaccinations are rolled out in the country, which would weigh on the recovery.
  • After peaking around the end of 2020, inflation is likely to moderate in the new year. (See Chart 1.) Elevated food price pressures on the back of supply chain disruptions caused by recent floods will probably unwind in the coming months. And we expect policymakers to maintain a firm hold on the currency, keeping import price inflation in check.
  • It’s tricky to predict the CBN’s moves at the best of time. On balance, we think that policymakers are shifting their focus towards growth and away from inflation – once inflation has passed its peak, the easing cycle should resume. We expect 150bp of cuts in Q1 2021, taking the policy rate from 11.50% currently to 10.00%. (See Chart 2.) Policy settings are likely to remain unchanged over the remainder of 2021 with the prospect of a vaccine propelling recoveries in Nigeria and its key trade partners.

Chart 1: Consumer Prices (% y/y)

Chart 2: Policy Interest Rate (%)

Sources: NBS, CBN, Refinitiv, Capital Economics

Sources: NBS, CBN, Refinitiv, Capital Economics


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