Nigeria’s Interest Rate Estimated to Hit 23.5% in 2023
The monetary policy rate is expected to rise by 500 basis points to 23.5% in 2023 as the country embarks on reforms, an independent research company based in London said in an update, noting that Nigeria’s risk premium has fallen back.
The apex bank switched to monetary policy tightening in May 2022 as inflation conditions worsened. Since then, the benchmark interest rate has surged by 700 basis points.
However, policy tightening has failed to curb the inflation surge in Nigeria. Instead, the CBN’s hawkish pose pushed commercial borrowing rates upward, reducing the productive capabilities of companies seeking further expansion.
Costs of borrowing from local lenders have crossed 30%, the same time when pressures from double-digit inflation and worsening naira reduced households buying power.
In the report written by William Jackson, its chief emerging market economist, and his deputy Jason Tuvey, the research firm nudged down Nigeria’s gross domestic product (GDP) growth forecasts.
“We expect growth of just 2.0% this year and 2.3% in 2024”, it said.
Capital Economics is of the view that Nigeria’s balance of payments should be placed on a more sustainable footing, but indicate less optimism that the authorities will be able to prevent public debt from staying on an upwards path.
Recall President Bola Tinubu has moved quickly to dismantle the unorthodox and distortive policies of his predecessor. In his inauguration speech, Mr. Tinubu abruptly announced the removal of costly fuel subsidies.
And, after the suspension of CBN Governor Godwin Emefiele, the naira was devalued and the exchange rate windows unified. The naira is currently trading at N760 per US dollar, compared with an exchange rate of N460 previously, and close to the parallel market exchange rate of N770
“This will result in some near-term economic pain. Inflation, which already stood at a 17-year high of 22.41% year on year in May, looks set to jump to more than 35% in the coming months”, Capital Economists predicted.
“We now expect the central bank to deliver a further 500bps of interest rate hikes, to 23.50%. We have nudged down our GDP growth forecasts and now expect growth of just 2.0% this year and 2.3% in 2024.
“We are sceptical that this represents a full U-turn from “Buharinomics” but, if the policy shift sticks, the balance of payments will be placed on a more sustainable footing”.
The emerging market economists said undoubtedly, there will be little boost to exports, as these are mainly oil, and imports may rise if FX restrictions are scaled back. >>>Nigerian Treasury Bills Yield Rises to 7%
“But foreign investment should recover. The fall in risk premia suggests this may already be happening. Any boost to the public finances is likely to be limited given the president’s preference to spend any additional resources”, said emerging market capital economists.
The past month has seen major moves in the region’s currency markets. Central banks in both Nigeria and Angola allowed their currencies to weaken in a shift towards more orthodox policymaking, and both are now down by more than 30% against the dollar.
That said, economists said in local currency terms, stock markets have generally risen over the past month. Nigeria has seen the biggest increase, spurred by the new government’s reform shift.
“We do not think the Central Bank of Nigeria has the appetite for aggressive rate hikes yet”, Tatonga Rusike, Sub-Saharan Africa Economist at Bank of America said. #Nigeria’s Interest Rate Estimated to Hit 23.5% in 2023
