Interest rate increase may not reduce Nigeria’s inflation — Fitch

The decision by the Central Bank of Nigeria to raise the main policy interest rate sharply in May is not a fundamental shift in the country’s unorthodox monetary policy, which will continue to impede efforts to rein in inflation, says Fitch Ratings.

“We believe Nigeria’s complex policy approach will be maintained at least until the next presidential election in February 2023.

“A significant strengthening of macroeconomic performance appears unlikely in the near term, despite the supportive effects of higher global oil prices for the economy”, Fitch Ratings noted.

It said the Russia-Ukraine war’s impact on global prices of food and energy had seen inflation accelerate in 2022.

Consumer prices rose 17.7% yoy in May, up from last year’s low of 15.4% in November.

Fitch now forecasts Nigeria’s inflation to average 17% in 2022, unchanged from the 2021 average. “In March 2022, we had predicted inflation this year would average 14.6%,” it said.

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It stated, “The authorities had planned to phase out fuel subsidies in 2022, but they are now unlikely to be removed before 2023.

“This helps to contain 2022 inflation, but the cost of the subsidy – borne by the Nigerian National Petroleum Corporation (NNPC) – has reduced NNPC transfers to government.

As a result, we forecast the general government deficit to narrow only moderately to 3.4% of GDP this year, from 4.2% in 2021.”

Fitch had expected at least one interest-rate hike in 2022, but the 150bp increase in the main policy rate to 13% on May 24 was larger than it had anticipated.

It said, “Further increases are possible, as officials with the CBN have indicated a preference for real interest rates to be less steeply negative.

“Moreover, we believe the CBN will use the Cash Reserve Ratio and the issuance of CBN special bills to tighten liquidity.

“The CBN is using these discretionary measures to inject or withdraw liquidity from the financial system, as well as influencing borrowing costs for specific sectors through various loan guarantees and direct support facilities.

“This has made monetary policy difficult to gauge and created a segmented interest- rate environment, impeding the transmission of monetary policy.”

The CBN adopted the Investor and Exporter (IEFX) window as the official exchange rate in May 2021.