Nigeria Rates on Hold as Central Bank Resists Political Pressureby , , and
Loosening monetary policy not advisable, Emefiele says
Inflation accelerated to an almost 11-year high in August
Nigeria’s central bank resisted political pressure to loosen policy and kept its main lending rate unchanged even as the finance minister called for lower borrowing costs to help stimulate an ailing economy.
The Monetary Policy Committee held the benchmark rate at 14 percent, Governor Godwin Emefiele told reporters Tuesday in the capital, Abuja. That was in line with projections of eight of the 17 economists surveyed by Bloomberg. One predicted a 100 basis point cut, and the rest said policy would be tightened by between 50 basis points and 200 basis points.
“Loosening monetary policy now is not advisable as real interest rates are negative, pressure exists on the foreign-exchange market, while inflation is trending upwards,” Emefiele said. Borrowing at lower rates “will stimulate demand for goods without taking action to boost industrial production of goods. Too much money chasing too few goods will worsen the inflationary condition.”
The Central Bank of Nigeria raised the monetary policy rate by 200 basis points in July to lure foreign capital and help prop up the naira. Finance Minister Kemi Adeosun said in an interview with broadcaster CNBC Africa Monday the MPC should reconsider the previous increase because it’s more important to focus on growth than on inflation.
“The members of MPC do not take their direction from the government,” Ayodele Salami, chief investment officer at Duet Group in London, said by phone. “The fact that the finance ministry was calling for a cut in rate and the CBN chose not to follow the request reinforces some of the credibility of the CBN.”
Inflation in Nigeria accelerated to 17.6 percent in August, the highest rate since October 2005, as the naira’s almost 40 percent drop against the dollar since the removal of a currency peg on June 20 made imports from food to industrial inputs more expensive. The peg caused foreign-currency shortages, which contributed to West Africa’s biggest economy contracting by 2.1 percent in the second quarter from a year earlier after shrinking 0.4 percent in the three months through March.
“This policy of holding the rate is more for price- and foreign-exchange stability than growth, which is consistent with the central bank’s mandate,” Michael Famoroti, an economist at Lagos-based Vetiva Capital Management, said by phone. “Leaving the rate at 14 percent is to keep attracting inflows.”
Monetary policy alone can’t move the economy out of stagflation and fiscal intervention is needed to complement the central bank’s work, Emefiele said. There are no quick fixes for inflation and the current stance will help to limit price growth, he said.
The naira strengthened 0.2 percent to 314.75 per dollar by 5:22 p.m. in Lagos. The currency is about 30 percent more expensive on the black market than the official exchange rate.
While the MPC resisted giving in to political pressure to cut interest rates, “we expect markets to be disappointed with this outcome,” Razia Khan, head of Africa macro research at Standard Chartered Plc in London, said in an e-mailed note. “Improved inflows are needed to provide a more concrete safeguard against higher inflation.”
The International Monetary Fund forecast the economy will shrink by 1.8 percent this year, the first full-year contraction since 1991. Power shortages, a decline in oil prices and output and the delayed passage of a 6.1 trillion-naira ($19.3 billion) budget planned to stimulate economic activity have weighed on output.