The Central Bank of Nigeria (CBN) surprised everyone by hiking rates 100 basis points up to 12 percent from 11 percent, on Tuesday, March 22, 2016.
All 14 analysts surveyed by Bloomberg expected the rate to remain unchanged. This decision comes just months after the CBN controversially slashed rates by two percent in November, down to 11 percent from 13 percent, despite escalating inflation and a wide current account deficit.
In light of that, Tuesday’s decision to hike rates “is, in many ways, a positive sign,” argues Capital Economics’ John Ashbourne in a note to client. “But this flip-flop on rates will raise yet more questions about the unpredictable and confusing direction of Nigerian monetary policy,” he warned. Ashbourne also argued that this “policy U-turn” might not have a major economic effect.
He pointed out that inflationary pressures have further escalated over the last few months and that this latest hike does not even completely undo the cut from November.
Additionally, Ashbourne observed that the Central Bank of Nigeria’s governor, Godwin Emefiele, showed no signs of reconsidering his FX restriction of holding the official exchange rate at N199/US$. This policy has led to shortages of imported goods, which has thus incentivized consumers to jump into the black market.
And finally, Emefiele’s speech didn’t really give a sense of what to expect next. As Ashbourne explained in his note:
“The governor began his speech by reiterating his view that monetary policy must remain ‘accommodative’ to support growth in the struggling economy which he described as ‘starved of liquidity’. This does not sit well with his subsequent decision to tighten policy. He also blamed high inflation on political risk, electricity costs, and seasonal variations, an explanation that conveniently ignores the effect of his own FX policies. It is not clear whether this break from looser policy – which has been supported by both Governor Emefiele and President Buhari – is a shift in both men’s thinking or an attempt by the governor to assert his independence.”
In short, it’s definitely a good sign that Nigeria moved towards a more conventional policy by hiking rates on Tuesday. But there are still plenty of problems that need to be addressed.
