Nigeria Set to Pause Two-Year Tightening Cycle as Inflation Cools
Nigeria’s monetary policymakers are expected to cautiously loosen their grip on a more than two-year tightening cycle on Tuesday, encouraged by cooling inflation.
Of 11 economists surveyed by Bloomberg, 10 foresee Governor Olayemi Cardoso announcing a halt to the central bank’s fastest series of interest-rate increases on record, when he delivers the monetary policy committee’s decision after 2 p.m. at a press briefing in Abuja, the capital.
The run that started in May 2022 has lifted the benchmark rate to 26.75% from 11.5%.
“With the MPC’s aggressive interest rate hikes since the start of the year and the previous decision to raise the key policy rate further, we are optimistic that the current tightening cycle has drawn to a close,” Brendon Verster at Oxford Economics Africa said by email. “This view is reinforced by the fact that the previous interest rate increase was the smallest in the MPC’s most recent tightening cycle.”
Nigeria’s inflation slowed to a six-month low in August to 33.2% as the effects of high prices from a year ago – after a currency devaluation and temporary removal of fuel subsidies – continued to wear off. A softening in food price rises also countered high energy and transport costs caused by persistent gasoline shortages since July.
What Bloomberg Economics Says…
“Slowing inflation and lackluster growth will likely convince Nigeria’s policymakers to refrain from raising the policy rate on Tuesday.” Rates will likely “stay on hold until the end of 2024. After that, we see the central bank easing policy in 1Q25,” said Yvonne Mhango, Africa economist.
Still, the 12-member MPC will be cautious to declare victory over inflation. It will use the rate pause to assess the impact of a steep increase in gasoline prices earlier this month, flooding in food-producing areas at the onset of the harvest season and currency fluctuations on inflation pressures.
“Core price inflation edged higher in August, which shows that underlying price pressures remain immense,” said Verster, adding that “recent hikes in fuel prices pose the risk of reigniting price pressures or at the very least, slowing the decline in inflation.”
Last week’s half percentage-point rate cut by the US Federal Reserve isn’t expected to sway Nigeria’s MPC.
Given the “pursuit of domestic price stability,” and the central bank’s aim to support the naira, the MPC will likely retain “high interest rates over the near term regardless of what the Fed decides,” Verster said.
Nigeria is also “unlikely to see a meaningful amount of portfolio flows enter the local markets on the back of lower US rates,” said Gergely Urmossy, emerging markets strategist at Societe Generale SA in London. Authorities “need to deliver comprehensive reforms contributing to macroeconomic and naira stability to attract portfolio inflows en masse,” he said.
