Nigeria Unexectedly Cuts Key Rate On Recession Threat
Monetary policy rate reduced to 2016-low of 11.5% from 12.5% First-quarter GDP contraction caused policy dilemma: Emefiele
The Central Bank of Nigeria unexpectedly cut its key interest rate to the lowest since 2016 on concerns of a looming recession in Africa’s largest economy.
Of the 10 members of the monetary policy committee who attended its meeting, six voted to lower the rate to 11.5% from 12.5%, Governor Godwin Emefiele said at a briefing in the capital, Abuja, on Tuesday. That’s the second cut this year and came even as inflation has been above target since 2015. All six economists in a Bloomberg survey expected the rate to remain unchanged.
Key Insights
Gross domestic product that contracted the most in at least 10 years in the second quarter presented a policy dilemma for the central bank, Emefiele said. While inflation accelerated faster than anticipated in August to 13.2%, that’s due to structural factors and not low interest rates, he said. The central bank will take bold steps to stabilize the exchange rate of the naira that it’s devalued twice this year, according to the MPC.
The lockdown of major cities to curb the spread of the coronavirus pushed up food prices faster and those remain under pressure due to floods, a weaker naira and clashes between herders and farmers. President Muhammadu Buhari’s order to ban access to foreign currency for food and fertilizer imports could also stoke inflation as businesses will look to parallel market for dollars. The government’s move to end fuel subsidies and raise electricity tariffs will also add to consumers’ costs.
GDP in Africa’s top oil producer will probably contract 5.4%, this year, according to the International Monetary Fund, the most in almost four decades. A shortage of dollars due a sharp drop in oil prices and central bank measures to preserve reserves could further hit the economy by curbing imports of inputs, according to business trade groups.
Over the past year, the central bank has introduced measures such as a moratorium on loan-interest payments, reducing lending rates for critical sectors and increasing the minimum loan-to-deposit ratio for banks in an effort to stimulate the economy. These interventionist steps have been paying off and will continue, Emefiele said.
– Bloomberg