Three Charts Show Why Nigeria Is Likely to Keep Rate on Hold

  • Nation battling scarcity of foreign currency after oil decline
  • Economy probably expanded in first quarter after 2016 slump

With dollar shortages persisting, a high inflation rate and an economy struggling to recover from the worst slump in a quarter of a century, Nigeria’s central bank will probably leave its key interest rate unchanged for a fifth consecutive meeting this week.

Governor Godwin Emefiele will announce the Monetary Policy Committee’s decision on borrowing costs on Tuesday afternoon in Abuja, the capital, just hours after the statistics office is scheduled to publish data showing whether West Africa’s largest economy is still contracting. All but one of the 22 economists and analysts surveyed by Bloomberg forecast the central bank will keep the key rate unchanged at 14 percent. One predicted a 100 basis-point cut.

The central bank in April introduced a window for portfolio investors to trade foreign currency at market-determined rates after removing a naira peg to boost dollar liquidity. This was done partly to support recovery of an economy that shrunk 1.5 percent in 2016, the first full-year contraction in 25 years, and to stem inflation that quickened to the highest rate since September 2005 due to surging import prices.

While the International Monetary Fund on March 31 advised authorities to tighten monetary policy to anchor inflation expectations and support the easing of capital controls, the central bank is likely to keep rates on hold, as the following charts show.

The scarcity of dollars was triggered in mid-2014 by a crash in prices of oil, the source of two-thirds of Nigeria’s revenue, and it worsened last year when production of the commodity in the country fell to an almost three-decade low. While investors welcomed the central bank’s currency-trading window and the naira rate for foreign investors has converged with the black-market rate, liquidity has so far been low, with only about $40 million traded daily, according to Exotix Partners LLP.

Inflation has slowed for three consecutive months to 17.2 percent in April after it accelerated every month for more than a year until January. The rate remains outside the government’s target band of 6 percent to 9 percent.

“It was more compelling to increase rates when inflation crossed 18 percent, and they didn’t,” said John Ashbourne, an economist at London-based Capital Economics Ltd. “I don’t see them increasing now when inflation has started easing.”

A report from the National Bureau of Statistics will probably show gross domestic product expanded 0.25 percent from a year earlier in the three months through March after it contracted for four consecutive quarters, according to the median of eight economist estimates in a Bloomberg survey.

“The next move will be down because policy makers have been making arguments for monetary policy to support growth if they get opportunity to loosen,” Ashbourne said.

— With assistance by Simbarashe Gumbo, and Paul Wallace

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