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Interest Rates: Out Of Control Government Spending Stays CBN’s Hand

By on January 21, 2013

Plans by the Federal Government to accelerate spending in 2013 will make it difficult for the Central Bank of Nigeria to reduce interest rates.

The inflationary effects of an expansive government spending regime will be too volatile to ignore, according to a survey of analysts. Seven out of eight analysts, surveyed by Bloomberg, believe that the Monetary Policy Committee will hold interest rates at 12%.

The MPC is expected to make the decision after it meets later today at CBN headquarters in Abuja. The decision to hold rates, if indeed taken later today, will be the ninth consecutive time the MPC has agreed to do so.

Inflation eased to 12 percent in December, remaining above the central bank’s target of below 10 percent.

Samir Gadio, an emerging-markets strategist at Standard Bank told Bloomberg, “The MPC will probably be worried that the possibility of fiscal consolidation doesn’t materialize at the pace that they would like.

“They’ll wait until the budget is signed by the president for more clarity on the fiscal stance for this year.”

Alan Cameron, an economist at CSL Stockbrokers said, “Although the MPC will appear concerned about growth, we doubt the recent slowdown can be reversed with lower interest rates.”