Weak Naira, Inflation Leave Nigeria Little Room to Cut Rates

LAGOS (Capital Markets in Africa) – A weak naira and stubborn inflation may prevent Nigeria’s central bank from following South Africa and Ghana in cutting interest rates.

Only two of 19 economists in a Bloomberg survey predicted the Monetary Policy Committee will reduce borrowing costs on Tuesday. The rest said the key rate will stay at a record high of 14 percent, where it’s been for a year. Governor Godwin Emefiele, who is scheduled to announce the MPC’s decision at about 2.30 p.m. in the capital, Abuja, said last month that tight monetary policy will continue.

The central banks of South Africa and Ghana cut their key rates in the last week as the inflation outlook in the two economies improved. While price growth in Nigeria, Africa’s most-populous nation, slowed for a fifth consecutive month to 16.1 percent in June, it is still well above the government’s 6 percent to 9 percent target range.

“Inflation remains very high,” Razia Khan, head of Africa macro research at Standard Chartered Plc, said in an emailed response to questions. “It would be wrong to demonstrate too much complacency.”

Nigeria’s economy, which vies with South Africa’s as the biggest on the continent, shrank for a fifth consecutive quarter in the three months through March as the oil industry contracted and agricultural growth slowed.

Keeping borrowing costs unchanged could help attract more flows into the so-called Nafex currency-trading market, which the central bank set up for foreigners in late April to try end a crippling shortage of dollars. While the naira is about 315 versus the U.S. currency in the official market, it’s weaker at 366.45 in the new window, about the same level as on the black market. Goldman Sachs Group Inc. and JPMorgan Chase & Co. are among Wall Street banks that say monetary policy needs to stay tight to protect the naira.

“The Central Bank of Nigeria will, in our view, maintain tight local currency liquidity conditions, not least to provide support to the naira,” JPMorgan analysts Sonja Keller and Yvette Babb said in a note to clients. “A policy rate cut would send the wrong signal.”

Source: Bloomberg Business News