Nigeria Central Bank Adds to Confusion With Policy Reversal

  • MPC unexpectedly raises interest rate by 100bps to 12%
  • Inflation exceeds target, while growth under pressure

Nigeria central bank Governor Godwin Emefiele just made investors’ job tougher by contradicting his own policy stance and raising interest rates.

Godwin Emefiele.
Godwin Emefiele.
Photographer: Philip Ojisua/AFP via Getty Images

The Monetary Policy Committee unexpectedly increased the benchmark rate by 100 basis points to 12 percent on Tuesday, concerned by the rapid acceleration in inflation. That was a partial reversal of the November rate cut of 2 percentage points and the easing bias outlined by the governor in the last MPC meeting in January.

“If we don’t know what he’s prioritizing and how he’s coming to his decisions, it’s very difficult for us to predict or understand where things will go in future,” John Ashbourne, an economist at Capital Economics Ltd. in London, said by phone.

Policy makers in Africa’s biggest oil producer had lowered the rate in November for the first time in six years to help support an economy hit by plunging crude prices. Since then, rising food and power costs have boosted inflation to 11.4 percent, above the central bank’s 6 percent to 9 percent target range.

“Reverting back to a tightening policy is contradictory to their decision at the last meeting,” Lanre Buluro, an equity broker and analyst with Primera Africa Securities Ltd., said by phone from Lagos, the commercial capital. “They have chosen to manage inflation rather than economic growth. The spike to 11.4 percent spooked the MPC.”

All 14 analysts surveyed by Bloomberg predicted the MPC would keep the benchmark rate unchanged at 11 percent. The cash-reserve ratio was raised to 22.5 percent from 20 percent after it was cut by 5 percentage points in November.

“The balance of risks has shifted against price stability,” Emefiele said.

Emefiele has already faced criticism for foreign-exchange restrictions that are hurting businesses. With the backing of President Muhammadu Buhari, the central bank has effectively pegged the naira at 197 to 199 per dollar since last year. It’s trading at about 320 per dollar on the black market. The naira traded at 199.05 to the dollar at 9:07 a.m. in Lagos.

Nigeria’s currency policy would be “very insane” if it continues, Unilever Plc’s Africa President Bruno Witvoet said in an interview on Monday. Businesses need more clarity, he said.

“To the extent that today’s decision signals a return to more conventional policy, it could actually enhance the CBN’s credibility,” Alan Cameron, an economist at Exotix Partners LLP in London, said in an e-mailed response to questions. “However, there’s been enough confusion about the overall direction of economic policy in the past few months that it will take time for this to happen.”

Record Budget

Emefiele tightened monetary policy in the face of a slowing economy and as he complained that banks aren’t extending enough credit to investors to spur growth. The economy expanded 2.8 percent in 2015, according to the statistics office, the slowest pace since 1999.

Buhari, a 73-year-old former military general, is seeking to spur growth with a record 6.1 trillion-naira ($30.6 billion) budget this year that was passed by the Nigerian senate on Wednesday, with the lower house expected to vote on the bill on Thursday. The government earned about two-thirds of revenue from oil in 2014. Crude traded in London has plunged 26 percent in the past year.

The central bank’s focus on inflation was the right one and may help to support the naira, according to Charles Robertson, chief economist at Renaissance Capital in London.

“The rate cut last year was about cutting government borrowing rates, and this is evidently less of a priority today,” he said. “Good move by the CBN.”

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