Nigeria Holds Key Rate at Record High to Stem Inflation Risk

LAGOS (Capital Markets in Africa)- Nigeria’s central bank held its main lending rate at a record high to curb inflationary pressures anticipated with election spending, and proposed ways to increase credit in the economy.

The Monetary Policy Committee voted to leave the benchmark rate at 14 percent, Governor Godwin Emefiele told reporters on Tuesday in the capital, Abuja. That was in line with the forecasts from all but one of 10 economists surveyed by Bloomberg. Three MPC members voted to increase the rate.

“Inflation forecasts point to further moderation,” but pre-election spending could boost aggregate demand, Emefiele said, calling for coordinated fiscal and monetary measures to stem the build-up of price pressures.

The central bank has held the rate since 2016 in a bid to prop up the naira and tame inflation after it spiked to double digits in the same year. Price growth has since slowed. Yet the bank anticipates the delayed passage of Nigeria’s record 2018 budget of 9.12 trillion naira ($25 billion) and pre-election spending to reflect in higher prices.

A stronger dollar and rising U.S. Treasury rates sparked outflows from emerging-market assets in recent weeks.

Prevent Sell-Off
“By keeping the rate, foreign investors are attracted to Nigerian assets — it will prevent a bigger sell-off in Nigeria and reduce currency pressure,” Adewale Okunrinboye, the head of Investment Research at Lagos-based Sigma Pensions said by phone.

The West African nation’s inflation was at a 2 1/2-year low in June, with prices increasing 11.2 percent, the National Bureau of Statistics said Monday. This was still above the bank’s target of 6 percent to 9 percent. Emefiele said in January that a drop in prices to closer to the central bank’s threshold could prompt it to cut the base rate by July.

The MPC is concerned about credit to the economy sliding and the central bank’s supervision department is working on ways to stimulate this, Emefiele said. It’s encouraging companies to issue commercial paper at single-digit rates and five- to seven-year maturities, and the CBN will “complement the efforts of banks” to support that by lending to the company at the same single-digit rate, he said.

Another proposal would see the central bank providing interest-free support to lenders who loan money for new projects at 9 percent, enabling the institution that’s providing the funds to earn that spread, he said.

“Rather than banks using their money to buy T-bills, they can put these in this sectors and we would provide the liquidity to fund these transactions as long as they meet the specified terms and conditions,” Emefiele said.

Source: Bloomberg Business News