Market News

By Nduka Orjinmo

(Bloomberg) -- The Central Bank of Nigeria’s cautious interest rate hike on Tuesday and optimistic messaging on inflation has some economists predicting its unprecedented two-year tightening cycle is over. 

Governor Olayemi Cardoso and his monetary policy committee opted for a quarter-point hike at their last meeting of the year. The increase was the smallest this year and only the second time it’s raised rates by that small a margin, in a tightening cycle in which the benchmark has more than doubled to 27.5% over the course of 14 meetings.

The governor reaffirmed the MPC’s resolve to continue “to fight the war” against inflation that quickened for a second straight month to 33.9% in October because of higher food and gasoline costs, and a weaker currency. 

But also said that he expects to “see greater results in the first quarter of 2025” from the measures the MPC has taken. Adding that the MPC is optimistic 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.

That messaging led South African bank Absa Group Ltd. and Capital Economics to predict the tightening cycle in Nigeria is over, though others continue to expect it will be extended. Here’s why:

Absa

“The tone of the post-meeting statement and the lower-than-expected hike” suggests that further tightening is unlikely, the bank’s economists led by Ridle Markus said in a research note Wednesday. “Our expectation that headline inflation will begin to decline in early-2025 bolsters this view.”

Capital Economics

Capital Economics concurs with Absa’s view that the MPC is done with rate hikes. 

“With Governor Cardoso sounding optimistic that the effects of petrol price hikes and the naira’s large devaluations on inflation will soon fade, we think the monetary tightening cycle is now over,” Africa Economist David Omojomolo said. He expects the MPC to stand pat until at least the second quarter of 2025. 

Standard Chartered Bank

The “token move” by policymakers at their last meeting of 2024 was anticipated following the continued month-on-month rise in inflation in October, said Razia Khan, chief economist for Africa and the Middle East at Standard Chartered Bank.

“Going forward, FX stability will be key to the fading of inflationary momentum,” she said. “In that event, we see little need for the CBN to tighten further.”

Oxford Economics 

The advisory firm expects exchange-rate dynamics to continue to play a central role in Nigeria’s inflation outlook, and therefore thinks “there is scope for additional interest rate increases next year.” 

The naira has depreciated about 46% against the dollar this year, in part because of efforts to liberalize the nation’s foreign-exchange market.

“We think interest rates could be lifted further in 2025, but not nearly to the magnitude witnessed this year,” Oxford Economics’ Brendon Verster said in a research note. “We now expect the monetary policy rate to be lifted by 100 basis points at most in 2025.”

Bloomberg Economics

Yvonne Mhango, Africa economist for Bloomberg Economics, sees the likelihood of a 75 basis-point raise over the CBN’s next three MPC meetings to restore positive real rates.

Cardoso has previously said the central bank wants a positive inflation-adjusted interest rate to attract investment and support the naira.

“We now expect rate hikes to continue through the second quarter of 2025, rather than the first quarter,” Mhango said. “As the real policy rate remains deeply negative at -6.4%, the central bank will likely continue hiking rates.” 

RMB

Economists led by Usoro Essien at Rand Merchant Bank that predicted a 75 basis-point hike on Tuesday, now expect the MPC to raise rates by 50 basis points in January, taking borrowing costs to 28%.

They “expect inflation to ease slightly in November, partly due to the base effect, and then revert in December due to the festive period.”

--With assistance from Paul Richardson.