The Central Bank of Nigeria CBN) is expected to keep the interest rate unchanged at 12 per cent as the Monetary Policy Committee (MPC) meets tomorrow and next.
If the MPC keeps the rate unchanged, it will be the 18th time in a row, it is taking such stance in an effort to control inflation and support the naira.
This week’s MPC meeting will be the second chaired by the new CBN Governor, Godwin Emefiele, and will be closely watched by foreign investors and analysts.
The former managing director of Zenith Bank, 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 the 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.
Inflation rose to a 10-month high of 8.5 per cent in August, closer to the CBN’s upper limit of nine per cent, after rising for five straight months this year on higher food prices and excess liquidity.
“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,” said Matthew Searle, sub-Saharan Africa Analyst at Business Monitor International.
Also, an Economist at Vetiva Capital, Adedayo Idowu, said with the 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.
Meanwhile analysts at Renaissance Capital (RenCap), an investment and research firm, have pre-dicted interest rate cuts by December next year to allow credit growth and boost real sector production.
Global Chief Economist at RenCap Charles Robertson said in the “Sub Saharan Africa Macro Strategy” released on Monday, that such step would allow interest rate move from high single digit, to mid-teens.
“Post-elections, we expect interest rate cuts in the second-half of 2015, which we think will allow year-on-year credit growth to pick up from current high single-digits to the mid-teens. This is positive for equities and the banks.
“Equally, it should give a lift to the consumer, as the effect of any pre-election wage hikes dissipates. We believe expansionary fiscal policy in 2015 is unlikely, due to capacity constraints and a desire to keep debt levels low,” he said.
He said the 2015 elections, though very near, should not distract investors. “Yes, elections are almost upon us in February, 2015, but we do not think that should detract from Nigeria’s otherwise solid macro credentials – especially given our view that the electoral process and outcome will be relatively stable,” he said.
Robertson explained that Nigeria is well ahead of the other countries under its coverage, given its improving external reserves position which cover nine to 10 months imports, and a small fiscal deficit of one to two per cent of GDP.
He said a recovery in the oil sector has led to stronger growth, which has been upwardly revised to 6.3 per cent and 6.5 per cent in 2014 and 2015, against prior forecasts of 5.7 per cent and 5.6 per cent.
He said: “We prefer Nigerian banks to Kenyan banks on a valuation basis. Admittedly, the operating environment in Nigeria is tougher against other key Sub-Saharan Africa markets and this has led to a lower sector-wide Return on Equity.
“The good news is, we see a recovery from December 2015, when we expect Nigeria’s monetary policy to ease, which is banks-positive.”
