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Easing inflation, stable naira show Nigeria MPC may be right

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Nigerian central bank Governor Godwin Emefiele’s tight monetary-policy stance and system of multiple exchange rates may have paid off through slowing inflation and a stable naira, and he’s not about to change that soon.

The Monetary Policy Committee is meeting this week with price growth at a two-year low. All but four of the 15 economists in a Bloomberg survey said the panel will continue its unchanged stance on Tuesday.

The MPC has kept its benchmark interest rate at a record 14 percent since July 2016 despite calls to lower rates to support economic growth. While gross domestic product expansion slowed in the three months through March, it’s now been positive for four consecutive quarters as the West African economy continues its recovery from a 2016 contraction.

Emefiele, 56, was appointed in 2014 by former President Goodluck Jonathan amid questions about the central bank’s independence. The finance ministry has urged the regulator to lower interest rates while some investors criticized foreign-exchange measures introduced under the former banker.

His policies have worked to stabilize the naira and moderate inflation, according to Peter Moses, an economist at Lagos-based Codros Capital Ltd.

On Tuesday “we expect the MPC to maintain the status quo and continue to communicate the inclination to cut when macroeconomic fundamentals better support that,” Moses said. “Monetary-policy makers have achieved a lot in price moderation and foreign-exchange stability, and wouldn’t want to be quick to jeopardize those achievements.”

Oil-Price Collapse
Oil is the government’s biggest revenue source and the price collapse from mid-2014, along with Emefiele’s tightening of capital controls, starved the country of foreign currency, throttling growth and pushing inflation to almost 19 percent in January 2017. The black market consequently thrived.

Emefiele banned importers of 41 items from full access to the currency market to suppress dollar demand. The central bank introduced various currency-trading windows, leading to a weakening of the naira rates used by investors, encouraged capital inflows and boosted foreign reserves.

While the International Monetary Fund has said the existence of multiple exchange rates creates distortions in the economy, Nigeria will probably maintain several naira rates until at least 2020, according to Moody’s Investors Service. This is because merging them could force the government to weaken the currency and raise fuel prices, which would accelerate inflation.

“Higher oil prices and production, as well as import compression that helped reduce FX demand, supported building up FX reserves,” said Yvonne Mhango, an economist at Renaissance Capital in Johannesburg. “As long as oil prices remain attractive, the FX situation will remain relatively stable.”

While the tight policy stance has helped inflation ease to 12.5 percent in April and price growth is below the central bank’s key rate for the first time in two years, it still exceeds the 6 percent to 9 percent target band.

The MPC is scheduled to start announcing its decision from 2pm in Abuja, the capital. The slowdown in economic expansion in the first quarter won’t be enough to push the panel to ease rates, according to Michael Famoroti, chief economist at Vetiva Capital Management Ltd.

The best way to stimulate growth “would be to further engender price and exchange-rate stability,” he said by email.


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Godwin Emefiele
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