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MPC to hold benchmark rate at 12%

By on July 22, 2014

The Central Bank of Nigeria’s Monetary Policy Committee will leave interest rates unchanged for the 17th time in a row on Tuesday as it tries to balance controlling inflation and supporting the naira with fostering growth, Reuters reported quoting its poll.

The MPC meeting will be the first chaired by the new Governor of CBN, Mr. Godwin Emefiele, and will be closely watched by foreign investors and analysts, Reutersreported.

The former group managing director of Zenith Bank Plc struck a dovish tone on rates two days after taking office in June, saying he would seek a gradual reduction in borrowing costs, which have been stuck at 12 per cent since late 2011.

That is much higher than 5.75 per cent in South Africa, which Nigeria overtook to become Africa’s largest economy earlier this year, and 8.50 per cent in Kenya.

Investors perceived his comments to mark a reversal of the hawkish policies implemented by his predecessor, Mr. Lamido Sanusi, that were credited with curbing inflation and supporting the currency, and sold bonds and the naira.

Emefiele has since said he will wait until after the presidential elections next year before making any rate cut, and all 20 analysts polled by Reuters in the past week expected the MPC to keep the benchmark rate steady at 12 per cent.

“Emefiele has laid out plans to cut rates in the medium term (but) we do not see any chance of this happening at July’s MPC, much less as inflation continues to creep up ahead of elections,” a London-based economist at CSL, a Nigerian-owned CSL, Mr. Alan Cameron, said.

Inflation in the continent’s biggest economy rose to a 10-month high of 8.2 per cent in June, closer to the CBN’s upper limit of nine per cent, after rising for four straight months this year on higher food prices and excess liquidity.

The nation will hold national elections in February and government’s spending is projected to rise ahead of the polls.

“Higher risk premiums and fiscal profligacy related to the election will keep pressure on the currency and price growth and Emefiele and his team will not want to exacerbate that by loosening policy too aggressively,” a sub-Saharan Africa analyst at Business Monitor International, Mr. Matthew Searle, said.

Prices have started to rise and the naira has lost almost three per cent this year following Sanusi’s departure.

“With the recent compression in fixed-income yields, as short-tenor maturities head south below the 10 per cent levels, the risks of negative real rates on Nigerian assets will again resurface,” an economist at Vetiva Capital, Mr. Adedayo Idowu, said.

Solid economic growth forecast for Nigeria this year gives further weight to tighter policy.

Last week, the government said it expected growth of 6.2 per cent in 2014, higher than revised 2013 growth of 5.5 per cent.

 

 

[Punch]