Nigeria’s Interest Rate to Hit 19% in July – Fitch

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Fitch RatingIn a bid to fight off the rising headline inflation rate and stabilize the price level as part of its mandates, the Central Bank of Nigeria (CBN) is expected to raise benchmark interest to 19% in 2023 to achieve targets.

Nigeria has seen a persistent increase in headline inflation amidst buckets of uncertainties triggered by externalities and government policy somersaults. Fitch Solutions said in a macroeconomic brief that the apex bank will hike benchmark interest rates in May, and July.

The CBN switched from a dovish stance to aggressive monetary policy tightening in May 2022 over distortion in the price level.

In February, the consumer price index worsened to 21.91%, according to data from the statistics office. The surge was driven by rising food prices and scarcity of naira that paralyzed economic activities in Africa’s largest economy.

“Consumer price inflation will remain uncomfortably high over the coming months driven by elevated food prices, incentivizing the central bank to tighten monetary policy further”, Fitch Solutions said in a report.

However, the firm stated that weakening economic fundamentals and pressure on Nigeria’s fiscal account will discourage the CBN to raise the policy rate beyond 19.00%.

“Hawkish language from Nigerian policymakers has led us at Fitch Solutions to revise our end-2023 policy interest rate from 18.00% to 19.00%. In March, the CBN increased the interest rate by 50bps to 18.00% at the March Monetary Policy Committee (MPC) meeting.

The pace of monetary tightening has slowed (for the first time since the start of the current tightening cycle the CBN hiked by less than 100bps), Fitch Solutions said.

“Even so, CBN Governor Godwin Emefiele struck a more hawkish tone than we had expected, saying in a press conference that the central bank ‘plans to continue to tighten, albeit moderately”, it added.

Monetary Tightening Cycle Not Over Just Yet

“We anticipate that the CBN will hike its policy rate by another 50 basis points to 18.50% at the upcoming MPC meeting in May 2023”, the report stated. It added that consumer price inflation will remain above target over the coming months, incentivizing the central bank to tighten monetary policy further.

Price growth accelerated from 21.8% in January to an 18-year high of 21.9% year on year in February 2023–– primarily driven by rising transport and food prices among others.

“We believe that the demonetization of high-value naira notes will have a limited impact on inflation in the coming months. While currency outside banks fell by over 70% year on year in January as a result of the demonetization policy, we expect inflation to remain high in the coming months.

“Weak domestic food production caused by rampant insecurity and the impact of widespread floods in 2022 will keep food price growth – the key driver of inflation – strong and add upside pressure to headline inflation”.

As such, Fitch Solutions forecasted that inflation will average 19.6% in 2023, more than double the ceiling of the CBN’s 6.0-9.0% inflation target range, resulting in the MPC retaining its hawkish bias over the short term.

In addition, the firm said that the CBN will hike by another 50 basis points in July amidst the expectation that policymakers will want to see a sustained disinflation path before concluding the current monetary tightening cycle.

Indeed, Governor Emefiele has indicated that he is seeking to establish positive real interest rates, adding that another hike is very likely as average inflation is expected around 20% in July. Fitch explained that there are two key reasons why we think that the CBN will keep the policy rate on hold for the rest of 2023.

First, it noted that weakening economic fundamentals will discourage the MPC from tightening monetary policy beyond 19.00%. It said the demonetization of high-value bank notes has resulted in acute cash shortages, which have disrupted commercial operations.

Nigeria’s purchasing managers’ index plummeted to 44.7 in February from 53.5 in January. Given a struggling oil sector and strong price pressures, analysts at the firm project that GDP growth will ease from 3.1% in 2022 to just 2.3% in 2023.

Second, weakening fiscal metrics will also disincentivize the CBN to hike further. Aggressive monetary tightening in developed markets in 2022 and risk-off sentiment have increased borrowing costs for Nigeria’s government, with Eurobond yields remaining elevated.

Domestically, the CBN’s tightening cycle means that local borrowing has also become costlier which is expected to have negative impacts on the employment level.

With Nigeria’s fiscal deficit set to widen to from 4.6% of GDP in 2022 to a 24-year high of 5.2% of GDP in 2023 raising interest rates further would worsen public finances, something analysts said they believe the CBN will seek to avoid.

Meanwhile, Fitch Solutions indicated there are substantial risks to its interest rate forecast. It said as a result of cash shortages following the CBN’s demonetization policy, supporters of President-elect Bola Ahmed Tinubu have called for the outgoing president to dismiss the CBN Governor.

This suggests that tensions between the executive power and the central bank may increase when Tinubu is sworn into office on May 29, according to the report. Fitch Solutions said if the new president does dismiss Emefiele, the appointment of a new governor could result in a shift in monetary policy. 


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