Stubborn Inflation Sees Nigeria Keeping Rate at Record HighBy and
Second-quarter expansion ends deepest slump in 25 years
Inflation slowed in August but is almost double the target
Nigeria’s central bank left its key interest rate at a record high to fight inflation and buttress its currency even as the economy recovers from the biggest slump in 25 years.
The Monetary Policy Committee held the key policy rate at 14 percent, Central Bank of Nigeria Governor Godwin Emefiele told reporters on Tuesday in the capital, Abuja. Seventeen of 19 economists in a Bloomberg survey said policy makers would keep the rate where it’s been since July 2016, with the others expecting reductions.
It was the first policy meeting since the statistics agency announced the economy of Africa’s biggest oil producer expanded 0.6 percent in the three months through June, following five consecutive quarterly contractions. While improved dollar supply has reduced import costs and helped ease inflation, price growth remains almost double the government’s target, partly because of higher food costs -- a trend that might continue after floods hit the food-producing Benue state.
“Although it would make it more attractive for Nigerians to acquire assets at cheaper prices, thus increasing their net wealth and therefore increasing spending as confidence rises, the committee felt constrained that loosening would exacerbate inflationary pressure and worsen the exchange rate and inflationary condition,” Emefiele said.
Nigerian authorities have eased currency-trading controls this year. They had been tightened after crude prices crashed in 2014, which exacerbated an economic crisis, hammered importers and deterred investment.
The decision “shows that the central bank is focused and not yielding to pressure to cut,” Kunle Ezun, an analyst at Ecobank Nigeria Plc in Lagos, said by phone. “There has to be gradual care and nursing of the economy before considering a tweak.”
Last month, monetary policy officials unified some of their rates when they let currency dealers quote naira levels used in actual trades. The move immediately weakened the naira’s interbank price 14 percent to about 365 per dollar, near the black-market rate, with the currency at 355.99 by 3:50 p.m. in the commercial capital, Lagos, on Tuesday.
Improved dollar supply also helped ease inflation by reducing import costs, but at 16 percent in August, price growth remains outside the central bank’s target of 6 percent to 9 percent.
The bank’s decision was prudent and there will be a stronger case for easing the rate early next year, depending on how the currency market is doing, said Michael Famoroti, an economist at Lagos-based Vetiva Capital Management.
“There is a lot more pressure on fiscal policy to support growth,” he said by phone. “For the bank, it has to ensure that it preserves the gains that we see in the currency market and do its best to tackle inflation.”
President Muhammadu Buhari’s administration plans to increase spending to a record 7.4 trillion naira ($19.7 billion) this year, as part of a wider plan to expand economic growth to 7 percent and create 15 million jobs by 2020 by pumping more crude, increasing farmlands and boosting infrastructure spending.
— With assistance by Jacqueline Mackenzie, Yinka Ibukun, Sophie Mongalvy, and Emele Onu