Nigeria Unexpectedly Cuts Key Rate for First Time in Three Years

LAGOS (Capital Markets in Africa) – Nigeria’s central bank unexpectedly reduced its key interest rate for the first time in more than three years to help boost the economy.

The Monetary Policy Committee voted to cut the rate to 13.5 percent from 14 percent, Governor Godwin Emefiele told reporters Tuesday in the capital, Abuja. The median estimate in a Bloomberg survey was for the key rate to be held at 14 percent.

Departing from his usual hard stance on inflation, Emefiele stressed the need for monetary policy to help boost economic growth and job creation. The West African economy is still recovering from five quarters of contraction in 2016 and 2017 and will probably expand only 2 percent this year, according to the International Monetary Fund.

Six of the 11 MPC members voted for the 50 basis-point cut, two wanted a 25 basis-point reduction, one favored a 100 basis-point cut and two said the rate should stay unchanged. The move is a shift from eight months ago, when three of the panel members favored rate increases.

The cut could bring some pressure to bear on the naira, according to Michael Famoroti, an economist and partner at Stears Business, a Lagos-based research and analytics firm.

“We are likely to see lower foreign inflows,” he said by phone. “In terms of the transmission of the 50 basis-point reduction, it is not going to have a significant effect on the economy.”

The bank held the base rate at a record 14 percent since July 2016 to fight inflation, which decelerated to 11.3 percent last month, but remains above the upper end of the authorities’ target range of 6 percent to 9 percent. Risks to the price outlook are outside the ambit of monetary policy, Emefiele said.

What Bloomberg’s Economists Say
“We are slightly more dovish than the CBN on the inflation outlook, but also see risks to the naira from a weakening balance of payments. We now expect another 50 basis points in policy rate reductions this year, but the MPC may shift again if pressure on the peg to the dollar intensifies or inflation surprises.” — Mark Bohlund, economist
Source: Bloomberg Business News