Nigeria faces the biggest test yet in interest rate call

Nigerian central bank Governor Olayemi Cardoso faces a critical test when he delivers his first interest-rate decision since taking office, with investors craving bold action amid public fury over the surging cost of living.

The naira has plunged almost 70 percent against the dollar and inflation is near a three-decade high. As a result, economists surveyed by Bloomberg expect Cardoso to announce a 250 basis-point hike to 21,25 percent later on Tuesday. 

He will begin discussing the monetary policy committee’s deliberations around 2 p.m. in Abuja (1 p.m. GMT).

“This is a crucial meeting for Nigeria’s central bank to show it can exert control over the currency while sticking to the new floating exchange rate policy,” Charlie Robertson, head of macro strategy at FIM Partners UK in London said.

The rising cost of living has spawned protests in several of Nigeria’s 36 states. That prompted a call by a senior aide to President Bola Tinubu for Cardoso to monitor the political impact of his decisions, in a nod to the risks of a public backlash.

Tinubu appointed Cardoso in September as part of a complete makeover of the central bank’s leadership and this is the first meeting of the MPC since July. The pace of inflation has subsequently risen to 29,9 percent.

The rate decision will follow a series of other recent steps by the central bank to bolster the currency and stem price pressures, including relaxing Nigeria’s widely-criticised foreign exchange regime alongside measures to boost local dollar liquidity. – Bloomberg

The MPC must act “aggressively” and consolidate the central bank’s bullish moves so far by hiking, “to improve the real rate of return and slow down the pace of depreciation in the naira,” said Ibukunoluwa Omoyeni, an economist at Vetiva Research. Nigeria currently has negative real interest rates when adjusted for inflation.

    What Bloomberg Economists Say “In its first rate-setting gathering since last July, the Central Bank of Nigeria will likely go big with a 400-basis-point increase to 22,75 percent on February 27. With inflation close to 30 percent, the Monetary Policy Committee will be compelled to tighten swiftly.”

Nigeria is enduring painful fallout from aggressive economic reforms last year aimed at boosting growth and luring foreign investment. At the heart of this fight is the central bank, which is trying to unify the official and unofficial markets in the country’s currency to stabilise the naira, which Cardoso has repeatedly described as undervalued.

Investors have taken notice: Nigeria’s dollar bonds have outperformed peers this month with returns of 2,6 percent. That compares with the average of 0,4 percent for emerging and frontier sovereigns in a Bloomberg index.

Cardoso took the helm of an institution in severe upheaval. His predecessor, Godwin Emefiele, was ousted by Tinubu shortly after the president took office in May. He was subsequently arrested on charges including fraud; allegations which Emefiele denies. His trial is ongoing.

Cardoso is now trying to restore orthodox central bank practice, including adopting inflation targeting, after years in which the institution under his predecessor blurred the lines between monetary and fiscal policy.

One consequence is the gap between the central bank’s policy rate, yields on the short-dated paper it sells at auction, and the much lower yields offered on government debt. That has made it hard for the MPC to mop up liquidity and improve policy transmission.

Goldman Sachs Group Inc. economists Andrew Matheny and Bojosi Morule said communication on this front will be more influential than the decision on the policy rate. That’s because “any rate adjustment is only relevant insofar as it actually transmits to market rates,” they wrote in a research note.

Bloomberg

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