Nigeria’s central bank is likely to raise interest rates on Tuesday in an attempt to curb soaring inflation and attract foreign capital, but it runs the risk of triggering a recession, a Reuters poll showed on Friday.
Nigeria’s inflation rate, at 16.5% in June, is near a decade high.
But the country relies on exports of crude oil, the price of which has fallen in the past two years, and economic growth has slowed dramatically.
Even so, the median forecast from a Reuters poll of 13 analysts taken July 18-21 predicted that Nigeria’s central bank would raise interest rates by 100 basis points to 13% at the conclusion of its two-day meeting on Tuesday.
But analysts, while leaning toward higher rates, were split on the outcome, given the dilemma of rampant inflation and a brittle economy.
That leaves central bank Governor Godwin Emefiele in a tough spot. “I think he has got to adjust rates, probably a 100-basis- point move (up). Given the higher inflation rate and the weaker currency, he has got to react on monetary policy,” said Aly Khan Satchu, an analyst and investor at Rich Management in Nairobi.
Five forecast a 100-basis-point increase, two forecast a 200-basis-point rise to 14% and one called for an aggressive 300-basis-point move to 15%.
Five more said rates would remain at 12%. Nigerian rates have been at 12% since March, when the central bank raised rates by 100 basis points.
“I suspect the authorities will try to influence treasury bill and bond yields higher in a bid to attract net capital inflows as they allow for some more flexibility in the foreign market,” said Ayomide Mejabi at Standard Bank, who expects no change on Tuesday but higher rates by the end of the year.
In an era of record-low sovereign bond yields in the developed world, Nigeria is missing out on the investor search for higher yield in emerging markets, because its inflation rate means real interest rates are negative. Analysts said a devaluation in the naira early last month was a step in the right direction, but not enough to attract investors.
For 16 months before that, Nigeria stubbornly held on to a peg of 197 naira, which hurt the economy.
The naira fell to an all-time low on Thursday, crossing 300 to the dollar for the first time on the interbank market.
Interest rate rises are expected to slow inflation to just over 15% by the end of this year and to 12.5% next year, according to the poll.
But in the meantime, growth forecasts have been slashed to just 0.7% this year, which might still be too optimistic. Growth is forecast to pick up to 3.2% next year.
“If you have half of the year gone, it is very difficult for a recovery in subsequent quarters to be enough to lift the economy out of a potential contraction,” said Rafiq Raji, managing director at Macroafricaintel Investment in Lagos.
“Now that they have started implementing much better economic policy, the exchange rate might trade freely, and the budget has begun to be implemented, you could easily expect some improvement in the third quarter towards the fourth quarter.”