Inflation uptick may push CBN to deliver one last rate hike: Capital Economics
The further rise in Nigeria’s headline inflation rate, to 34.8% year-on-year in December, raises the risk that the central bank will push ahead with one last interest rate hike at their next meeting in February, London-based Capital Economics has said.
“That said, we remain confident that a more stable naira and petrol prices will allow for the disinflation trend to resume soon, with interest cuts on the table from the second half of the year,” David Omojomolo, Africa economist at the economic research firm, said in a note.
The Central Bank of Nigeria embarked on an aggressive rate hiking cycle last year, starting with a 400-basis-points increase in its benchmark interest rate in February and a total of 875 basis points to 27.5 percent. While it translated to huge interest incomes for banks, it put immense pressure on businesses as borrowing costs surged.
Omojomolo pointed out that the December outturn marked the fourth consecutive month that Nigeria’s headline rate had risen, from 34.6% in November, and exceeded the firm’s prediction that inflation would edge down to 34.4%.
He said: “The breakdown of the data will have worried central bank policymakers, with core inflation ticking up from 28.8% y/y to 29.3% y/y. Transport prices and other services recorded significant increases, which may be associated with the festive period. One positive, though, is that food inflation fell back in December from 39.9% y/y to 39.8% y/y. What’s more, in month-on-month terms, the headline inflation rate slowed in December compared to the previous month.
“Nonetheless, the uptick in the headline year-on-year rate, risks encouraging the Central Bank of Nigeria to deliver one last 25bp hike to 27.75% hike at their next meeting in February. There’s enough evidence in the data from more balanced petrol prices to a stable naira to suggest that the disinflation trend will soon resume though, meaning that interest rate cuts are on the table in the second half of the year.”
