New Telegraph

‘Inflation, interest rates’ll affect Nigeria’s GDP growth’

Nigeria’s sluggish economic growth is likely to persist this year due to high inflation and interest rates, as well as worsening insecurity in the country, analysts at Cowry Asset Management Limited have said. They stated this in a report that reflected their views on the decision of the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) to leave rates unchanged last Tuesday and the National Bureau of Statistics’ (NBS) earlier release of Q1’21 Gross Domestic Product (GDP) data, which showed that Nigeria’s economy economy continued to experience growth-0.51 per cent – in the first quarter of 2021.

According to the report, which was obtained by New Telegraph, “the relatively high inflation and interest rates, as well as the worsening insecurity would limit the potential GDP growth in 2021 – IMF’s 2021 growth forecast was 2.5 per cent. “Meanwhile, we note that the unanimous decision of the committee members to leave all key policy parameters unchanged was to allow further economic growth given the fragile GDP growth rate printed in Q1’21.

“However, we feel that the harmonisation of the exchange rate at the official and Investors & Exporters (I&E) windows, worsening insecurity, probable subsidy removal and market reflective electricity tariff, may in the medium-term assert pressure on inflation rate and negatively impact growth.” NBS had released its report penultimate weekend, which indicated that the fragile 0.51 per cent growth was propelled mainly by a 0.79 per cent growth in non-oil sector; with the information & communication, manufacturing and agricultural sectors recording the biggest growth rates of 6.47 per cent, 3.40 per cent and 2.28 per cent respectively. Also, in line with analysts’ predictions, MPC, at the end of its two-day meeting last Tuesday, held all key policy parameters constant.

Thus, the benchmark interest rate – the Monetary Policy Rate (MPR) – was unchanged at 11.50 per cent and the asymmetric band was retained at +100 bps and – 700 bps around MPR. Furthermore, the Cash Reserve Ratio (CRR) was retained at 27.50 per cent and the Liquidity Ratio left unaltered at 30 per cent.

However, prior to the release of April 2021 inflation data, by NBS, a fortnight ago, which showed that headline inflation retreated for the first time in twenty months to 18.12 per cent in April from 18.17 per cent recorded in March, the view in some quarters was that members of the MPC could vote for a rate hike. According to analysts at CardinalStone Research, inflation moderation, for now, reduced the chances of an increase in the MPR. As the analysts put it in a note issued ahead of the MPC meeting, “we believe the halt in inflation provides a hitherto muted argument for advocates of dovish monetary policy.

In the previous two policy meetings, the doves have accumulated 100 per cent (January) and 67 per cent (March) of total votes to ensure that previously instituted stimulatory monetary measures remain in place. “With MPC previously signaling plans to combat inflation head-on if growth strengthens and price pressures accentuate, the slowdown in inflation may have, once again, cemented the likelihood that the hawks would remain in the minority at the MPC and calmed expectations of an indicative rate hike even after a positive Q1’21 GDP report.

“The urgency for a policy rate increase may have also been slightly watered down (from a currency perspective) by on-going plans for Eurobond issuance, recovery in crude oil prices, increased inflow of remittances and expected harmonisation of the official market and I&E FX rates. We, therefore, expect the MPC to leave policy parameters unchanged at the coming policy meeting. The inflation numbers are also likely to limit the scope for material yield increases in the fixed income market ahead of the committee’s decision.”

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