Lower Interest Rate Key to Strengthen Nigeria’s Credit Profile –Moody’s
Ahead of the monetary policy committee decision on benchmark interest rate, Moody’s rating has revealed in a note that lower interest rate is key to strengthening Nigeria’s credit profile.
To anchor consumer price index, the monetary authority had changed policy direction by tightened benchmark interest rate. The monetary policy rate movement was fast tracked to 26.75% on the back of stubborn inflation condition in Nigerian markets.
A number of investment banking firms projected that the central bank policy committee will maintain status quo on policy rate as macroeconomic indicators began to improve. Disinflation began in July, and has been sustained with possibility of reversal due to latest adjustment to petrol pump price by the government.
In its comment, Moody’s noted that inflation fell to 32.2% in August, which the second consecutive decline in the rate since its peak at 34.2% in June.
The tentative reversal in the trajectory of inflation, if maintained, is a credit-positive indication of progress towards macroeconomic stability, Moody’s said in a commentary note.
The global rating agency explained that persistently high inflation leads to stronger social pressures for government measures to mitigate purchasing power erosion and rising interest rates, which in turn represent risk to the country’s fiscal outlook.
It added that a strong fiscal outlook and lower interest rates are key to strengthening Nigeria’s credit profile. The pick-up in inflation since mid-2023, from an already high 22.8% in June 2023, was driven by reforms to the foreign-exchange regime and removal of long-standing fuel subsidies.
Analysts noted that this resulted in higher energy prices and successive devaluations of the naira, which have increased import prices.
Earlier this year, amid high inflation, social pressures led the government to reverse its initial decision to remove fuel subsidies. With protests flaring across Nigeria in August, restoring price stability remains key to avoiding social pressures derailing reforms that underpin Moody’s positive outlook on the country’s rating.
The fall in inflation reflects a decrease in food price inflation to 37.4% in August from 40.8% in July, largely because of a base year effect as the strain of the first naira devaluation in June 2023 fades.
However, upside risks to inflation remain because fuel prices continue to increase and severe flooding in northeast Nigeria risks disrupting agricultural output, the rating agency said.
The flooding after torrential rains led to a dam overflowing on 9 September has displaced hundreds of thousands of people and damaged key infrastructure in the northeastern Borno state.
However, a more stable exchange rate on the back of improved foreign-exchange liquidity provides some stability to Nigeria’s Consumer Price Index. #Lower Interest Rate Key to Strengthen Nigeria’s Credit Profile –Moody’s
