Fading Base Effects to Keep CBN in Hawkish Poise
Following eight months of moderation in headline inflation rate without adjusting benchmark interest rate, analysts think the impacts of fading base effects on consumer price index would keep Central Bank (CBN) in hawkish poise in 2022.
Apart from that, Global Central Banks are shifting to tightening mode and interest rates may start to rise for advanced countries in 2022. In the United States, Federal Reserve would likely hike rates twice amidst a move to speed up bond-buying tempering.
Nigeria’s interest rates may most likely rise to deter investors from exiting the economy, according to analysts’ notes. Due to the shortage of dollars, Nigeria requires foreign portfolio inflow into the economy more than ever as demand for dollars would rise ahead of 2023 election.
This would requires attractive yield on fixed income instrument which has traded mostly quiet in 2021 due to negative return. The market would more likely require an inflation-linked return as the government plans to borrow to finance budget deficit in the current year.
MarketForces Africa reported that the South African Reserve Bank started its hiking cycle in November, raising its benchmark rate by 25 basis points to 3.75% For 16 months, the Central Bank of Nigeria has kept a loose monetary policy, a move driven by the need to reflate the economic performance.
Nigeria’s gross domestic products (GDP) had slipped by about 2% in the financial year 2020 amidst the pandemic induced economic pressures emanated from lockdowns and weak global inactivities.
In 2021, Nigeria’s economy expanded just 0.11% in the first quarter, 5.01% in the second quarter and 4.03% in the third quarter amidst an expectation the nation would consolidate on growth in the last quarter.
While the CBN tolls conservative path, fiscal authority has been on expansionary move. However, fiscal slippage remains a key threat to spending. But Nigeria keeps ignoring this with massive borrowings.
Moderation in headline inflation rate, settling at 15.4% in November gave the monetary policy committee of the Central Bank an impetus for keeping key benchmark rates for the last time in 2021.
For the whole of last year, the CBN policy committee kept the monetary policy rate at 11.5%. Recall the apex bank reduced MPR from 12.5% to 11.5% in September 2020.
Coincidentally, the headline inflation rate was up for 12-months in 2020 amidst the pandemic induced pressures. Disruption to the supply chain caused the nation’s price level to surge.
While policy authority adopted wait-and-see measures to track inflation, other frontier markets central banks raise interest rates.
Headline inflation began to fall in April but remain relatively high due to several factors, including the impact of ongoing supply chain disruptions, second round effects of higher energy prices, and the pass-through to import costs from weaker exchange rates.
CBN had set 6-19 % inflation rate target, which is in stark contrast to current 15.4% figure ahead of the Removal of subsidy which analysts think may heighten inflation rate. # Fading Base Effects to Keep CBN in Hawkish Poise
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