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Hot Topic Comment on Interest Rates

By Lukman Otunuga, Senior Research Analyst at FXTM

It is no surprise that the Central Bank of Nigeria (CBN) has left interest rates unchanged today at 11.5%.

While central banks across the globe have embraced looser monetary policy to defend their respective economies against Covid-19, the CBN simply does not have enough breathing room. Given how inflation remains well above the 6-9% target, a rate cut could fuel inflationary pressures – ultimately impacting economic growth.

But this is where things get tricky. Activity in Africa’s largest economy has displayed signs of improvement thanks to the easing lockdown restrictions and rising oil prices.

However, the second wave of infections and ongoing uncertainty over the vaccine rollout threatens to sabotage any meaningful recovery. With the coronavirus pandemic already derailing the CBN from its price stability mandate, the bank is likely to adopt a wait-and-see approach for the foreseeable future.

Should the growth outlook deteriorate due to Covid-19, the CBN may end up enforcing unconventional tools in an attempt to revive growth. These include tweaking the loan to deposit ratio, liquidity ratio, and cash reserve ratio.

The monetary policy committee once again expressed concern about rising inflation. Indeed, inflation is expected to remain elevated due to supply disruptions created by Covid-19, tightening border restrictions, the increase in VAT, and removal of a fuel subsidy. With the trajectory on inflation pointing north, interest rates are unlikely to move below 11.5% anytime soon.

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