NIGERIA REACT: CBN Holds Key Rate, Clarifies Exchange Framework

LAGOS (Capital Markets in Africa) — The Central Bank of Nigeria kept its key policy rate unchanged at 11.5% at its March meeting, as was widely expected. The decision reflects the committee’s desire to strike the right balance between support for the economy and the need to contain the country’s rising inflation pressures. Governor Godwin Emefiele also confirmed the devaluation of the naira but rejected claims the CBN had moved to a flexible exchange rate regime.

Nigerian policymakers have been faced with the dilemma of low growth and above-target inflation since the onset of the coronavirus pandemic. The economy is expected to rebound 2% this year, in line with market expectations. However, the recovery remains fragile for now, with recurring waves of the infection amid a slow vaccine rollout posing significant downside risks to the near-term growth outlook. The unabated rise in the country’s unemployment rate is also a concern for policymakers.

As such, the committee felt it appropriate to hold rates a little longer to allow more time for the recovery to gather pace. The hold is further supported by the committee’s view that inflation pressures will start easing from May when a recovery in the output should alleviate some of the supply-side factors driving inflation up.

The hold was supported by six committee members, with three others voting for a rate hike — two for a 50 basis point increase and one for 75 bps. The vote split is a departure from past rate decisions, which were unanimous. It also supports our view that the central bank will start raising rates later in the year, once the economy is on a stronger footing.

Separately, the CBN confirmed in the post-announcement Q&A session that the official exchange rate has been adjusted in line with the more flexible rate observed in the importers and exporters window. The action was characterized as a devaluation of the currency rather than a move to a more flexible exchange rate. “The naira is still a managed float” Emefiele said.

By Boingotlo Gasealahwe covers Africa for Bloomberg Economics in Johannesburg. She previously worked as a senior economist in the economic policy division of the South African Treasury. She has an MSc in development economics and an MBA from Oxford.