Economy contracted for the first time in 25 years in 2016
Nigeria left its benchmark interest rate unchanged for a fourth consecutive meeting to balance lifting the economy out of its worst slump in 25 years with fighting inflation at almost double the government’s target.
The Monetary Policy Committee held the key policy rate at 14 percent, Central Bank of Nigeria Governor Godwin Emefiele told reporters in the capital, Abuja, on Tuesday. That was in line with the forecast of all 17 economists surveyed by Bloomberg.
While inflation in Africa’s most-populous nation slowed for the first time in 16 months to 17.8 percent in February, it still exceeds the target range of 6 percent to 9 percent. Consumer prices surged after the central bank removed a 197-199 peg against the dollar in June, causing the naira to lose more than 40 percent of its value, and as a shortage of foreign currency made the import of everything from gasoline to food more expensive.
The slowdown in inflation in February was partly due to base effects, Emefiele said. Price pressures continue, he said. Nine of 10 MPC members voted to keep borrowing costs unchanged and one favored increasing the rate.
Holding rates will “keep system liquidity tight in defense of the naira,” Lagos-based Investment One Financial Services Ltd. said in an emailed note before the rates decision was announced. While inflation may decelerate on the higher base effect of 2016, “potential for a shift to a liberal foreign-exchange regime and its implication” for prices of gasoline remains a risk to the inflation outlook, it said
The government said increased production of oil, Nigeria’s biggest export, will help to stabilize the foreign-exchange rate and provide more funds needed to stimulate the economy after it shrank by 1.5 percent last year, the first contraction since 1991. The government aims to boost output to 2.2 million barrels a day this year from an almost three-decade low of 1.6 million barrels a day in the third quarter of 2016 when disgruntled militants blew up several pipelines in the Niger River delta.
S&P Global Ratings spared Nigeria a downgrade and affirmed its B assessment, five levels below investment grade, with a stable outlook on March 17. The rating company said increased oil output and capital expenditure by the government will help the economy expand by an average of 3.4 percent annually through 2020. The government earlier this month released an economic blueprint to boost growth to 7 percent, create 15 million jobs and reduce the inflation rate to less than 10 percent by 2020.
While the government’s plan proposes allowing a market-determined exchange rate, Emefiele said in a March 11 speech a free floating currency would increase the inflation rate and hurt the economy. The central bank has regularly sold dollars to keep the naira between 305 and 320 against the greenback over the past four months. Foreign-currency sales have helped the naira gain slightly on the black market to about 440 per dollar compared with a record-low of 520 last month.
The central bank is optimistic that the official and black-market exchange rates will converge, Emefiele said. People betting against naira are “on the wrong side of the bet,” he said