July 20, 2023

The Central Bank of Nigeria will likely continue raising its key interest rate in the coming days and months to support a devalued naira, a Reuters poll found on Thursday, a strategy that could help create a healthier trade balance.

As some emerging market economies that began hiking rates sooner than richer nations begin to reverse course, Nigeria likely still has some significant tightening to do to turn its economy around after years of unorthodox policy.

The Central Bank of Nigeria (CBN) is expected to raise its monetary policy rate by 100 basis points to 19.50% on Tuesday, with the most aggressive forecasters predicting a hike double that size, the poll found.

“We expect Nigeria’s monetary policy rate to be raised by 100 basis points to 19.5% as reforms recently introduced will exacerbate near-term inflation that is already running close to record highs,” said Thomas Gillet, lead analyst for Nigeria at Scope Ratings.

However, forecasts were spread out almost equally between no change and hikes of 25, 50, 100, 150 and 200 basis points.

The CBN has raised rates 700 basis points since early last year in a bid to tame double-digit inflation, which was 22.79% year-on-year in June.

The bank allowed the naira currency to drop last month, days after newly elected President Bola Tinubu suspended the central bank governor who oversaw much-criticised multiple exchange rates. The currency is now hovering around 780 per U.S. dollar.

Cabinet appointments must happen by law within two months of President Tinubu’s inauguration but analysts say the formal appointment of a new CBN governor could take longer.

“It’s a tough call for the CBN with no permanent governor in place … and the prospect of a further rise in CPI in July,” said Charlie Robertson, head of macro strategy at FIM Partners.

The poll suggests inflation will remain stubborn, slowing slightly to 20.1% next year from 23.5% this year.

Analysts say authorities will take into consideration the impact of fuel subsidy cuts to middle class incomes.

“The naira is about 10-15% cheap on my model – this is enough to push the current account into surplus, improving the fiscal balance by boosting naira revenues. It should help cut inflation and in time interest rates,” Robertson added.

Robertson said the biggest economic boost is probably coming from improving access to foreign exchange for investors and the re-opening of Nigeria to global investors.

The poll forecast Nigerian gross domestic product would grow 2.8% this year. It predicted other oil producers where currency weakness is evident will also post weak economic growth, with Angola growing 2.5% and Ghana 1.7%, a far cry from the boom years.

Authorities in Nigeria hope a “J-curve” – a corrective effect on a country’s trade imbalances after a currency devaluation – will eventually rescue the naira from its weakness.

David Omojomolo at Capital Economics said that key to the strength of naira outlook will be whether the current administration can continue to convince investors the unorthodox economic policies pursued previously will not return.

The poll also found the Bank of Ghana is expected to keep rates on hold at 29.5% on Monday, while Kenya’s central bank is forecast to hold its main rate steady at 10.5% on August 9.

REUTERS