Interest Rate Changes on Hold to stabilise Ecomomy

The Central Bank of Nigeria (CBN) will leave interest rates unchanged for the 17th time in a row tomorrow as it tries to balance controlling inflation and supporting the naira currency with fostering growth, a Reuters poll found. The Monetary Policy Committee (MPC) meeting will be the first chaired by new CBN Governor Godwin Emefiele and will be closely watched by foreign investors and analysts. The former managing director at local 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% since late 2011.

That is much higher than 5.75% in South Africa, which Nigeria overtook to become Africa’s largest economy earlier this year, and 8.50% in Kenya. Investors perceived his comments to mark a reversal of the hawkish policies implemented by his predecessor Lamido Sanusi that were credited with curbing inflation and supporting the currency, and sold bonds and the naira. Emefiele has since said he would wait until after 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%. “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,” said Alan Cameron, London-based economist at Nigerian stockbroker CSL.

Inflation in Africa’s biggest economy rose to a 10-month high of 8.2% in June, closer to the central bank’s upper limit of 9%, after rising for four straight months this year on higher food prices and excess liquidity.

h3. Currency Risk

Nigeria will hold national elections in February and government spending is projected to rise ahead of 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,” said Matthew Searle, sub-Saharan Africa Analyst at Business Monitor International.

Prices have started to rise and the naira has lost almost 3% this year following Sanusi’s departure. Yields on the government’s most liquid three-year bond have fallen consistently to 11%, results from a bond auction showed on Wednesday, compared with 14% at the start of the year due to excess liquidity. “With the recent compression in fixed-income yields, as short-tenor maturities head south below the 10% levels, the risks of negative real rates on Nigerian assets will again resurface,” said Adedayo Idowu, economist at Vetiva Capital.

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% in 2014, higher than revised 2013 growth of 5.5%.The naira firmed to a seven-week high of 161.90 this week on foreign inflows into bonds, but remained outside the bank’s preferred target band of 150-160 against the dollar, which the monetary policy committee is likely to take into account. “Nigeria remains reliant on portfolio inflows to stabilise the currency, and these require attractive nominal and real yields to maintain,” CSL’s Cameron said.

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