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What Nigeria’s 34.6% inflation means for interest rate next year - BUSINESSDAY
Nigeria’s annual inflation rate quickened to a more than 28-year high, dampening hopes for a quick easing cycle by the central bank next year.
Economists and analysts had projected that the monetary policy committee (MPC) may begin to soften its stance given the unexpected token rate hike last month.
But with Nigeria’s inflation climbing to 34.6 percent in November 2024, the tightening cycle may not be ending anytime soon.
Olayemi Cardoso recently revealed that the CBN’s measures to anchor the stubbornly high inflation and shore up the weak naira “are not intended to be permanent”, emphasising that the apex bank is “closely monitoring the data and as inflation shows sustained signs of improvement – something we expect in the near future – we will adjust rates accordingly.”
The rise in November marks the third consecutive increase after a brief decline in July and August with rise in food and transport costs being the major driver.
“The CBN will be motivated by data to begin its easing cycle. Generally, inflation is expected to begin to slow starting next year. Base effect should also pave the way for a possible cut,” a source conversant with the matter said.
“The accretion of FX reserves should have an effect on the exchange rate and, by extension on the inflationary level,” the source added.
The Abuja-based bank beats market forecasts by raising its key benchmark interest rate up 25 basis points, marking the sixth straight rise but the lowest it has been jacked up under CBN governor Olayemi Cardoso.
The quarter-point hike now puts the borrowing costs at 27.5 percent with a cumulative 875 basis points — the longest tightening cycle since the reenactment of the CBN Act in 2007 — highlighting the pressing need to stabilise prices and support the currency.
Cardoso said at the last MPC meeting that the policymakers unanimously agreed to be cautious with further rate hikes, holding on the optimism that the market will “see greater results in the first quarter of 2025” from the measures the MPC has taken.
He further leans on the prospect that the deregulation of the petroleum industry will eliminate shortages and help stabilize fuel prices, while steps to improve security in Nigeria’s food-producing northeastern region will help ease food-cost pressures coupled with the policy lag expiration.
Just like the CBN governor, analysts are optimistic that prices may begin to moderate in the first quarter of 2025 on the back of base effects and the full effect of the unceasing monetary policy rate, ushering in the beginning of the easing cycle.
Bismarck Rewane, the MD/CEO of Lagos-based Financial Derivatives Company (FDC) considers the 25bps “a slap on the wrist” as the market had expected a 50bps, emphasizing that the MPC were being cautious in a move to observe the effects of the previous rate hikes.
“This is the smallest rate hike in 16 months, signaling that the monetary tightening cycle is coming to an end,” the renowned economist said in a TV presentation recently.
On the contrary, another economist, Samson Simon, chief economist at Abuja-based ARRK Economics and Data Limited said though there’s a deceleration in rates, it “does not automatically mean that is the end of the tightening cycle”.
“There could be an acceleratNigeria’s Cardoso Signals Rate Cuts Next Year as Inflation Coolsion, if the need arises. As inflation at 34.6 percent is over the Nigerian ideal target of 6-9 percent,” Simon said.
“And when you juxtapose the current inflation rate to the global best practice of 2 percent inflation target, then you realise the war on inflation is far from over. So, it remains to be seen if the last hike would be the end of the tightening cycle,” he added.
In his view, Tobi Ehinmosan, macroeconomic and fixed income analyst at FBNQUEST Capital Research considers ending the tightening cycle as “too early” as Nigeria’s inflation still remains in contrast with the central bank’s target.
The CBN had set an ambitious target of taming inflation to 21 percent by year end, but with structural challenges and persistent insecurity plus flooding in the food-growing regions, the projection has been far from achieved.
“There is really no pointer to say that we are coming to the end of this rate hike cycle,” Ehinmosan said, adding that “they want to send a signal that they would, in the next two meetings or so, hold on to their rate hiking cycle”.
He noted that “the turning point that I see, or I foresee is if Nigeria’s inflation numbers drop, and then I won’t be too quick to say inflation will drop in Q1”.
