Nigeria’s monetary easing on pause… for now - Capital Economics
Africa Economics

Nigeria’s monetary easing on pause… for now

Africa Economics Update
Written by Virag Forizs

Following today’s decision to keep interest rates on hold, we think that Nigerian policymakers will cut interest rates once more this year as inflation stabilises and the economic recovery proves weaker than the central bank expects.

  • Following today’s decision to keep interest rates on hold, we think that Nigerian policymakers will cut interest rates once more this year as inflation stabilises and the economic recovery proves weaker than the central bank expects.
  • Following a surprise rate cut in May (see here), policymakers at the Central Bank of Nigeria (CBN) kept their benchmark rate unchanged at 12.50% today in a decision that was in line with our forecast and the consensus collected by Bloomberg.
  • Policymakers are clearly concerned about rising inflation. Price pressures have been gradually rising across the board since mid-2019. And in June, the headline rate reached a 27-month high of 12.6% y/y, well above the upper bound of the central bank’s 6-9% target range. (See Chart 1.)
  • The currency remains under pressure, giving the CBN another reason for caution. Following a devaluation in March, when the official naira exchange rate was allowed to weaken by 15% against the dollar and the more-widely used Nafex rate by 3% (to N360/$ and to N380/$, respectively), the central bank appears to have further loosened its grip on the currency by letting the official rate slide to N380/$. (See Chart 2.) Even so, the naira has continued to fall on the black market, to N472/$ or 19% weaker than the official rate.(See here.)
  • Looking ahead, inflation will probably keep rising in the coming months, peaking in Q3, as the weaker currency pushes up the price of imported goods. (See Chart 1 again.) And we expect the economic recovery from the coronavirus crisis and low oil prices to be weak and slow-going. (See Chart 3.) Policymakers at the central bank appear more optimistic than we are.
  • Predicting the CBN’s moves is notoriously tricky. On balance, we think there will be scope to cut rates once again this year as inflation passes its peak and the economy struggles to rebound. There seems to be support amongst MPC members to continue easing monetary policy – two (out of ten) members voted for a rate cut today. We’ve pencilled in a 50bp cut, to 12.00%, in late 2020. (See Chart 4.)

Chart 1: Consumer Prices (% y/y)

Chart 2: Exchange Rates (NGN per USD)

Chart 3: GDP (% y/y)

Chart 4: Key Policy Rate (%)

Sources: NBS, CBN, Refinitiv, Capital Economics


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