SA and Nigeria Favour Maintaining Rates

The central banks of Africa’s two largest economies will probably leave borrowing costs unchanged on Tuesday after Nigeria’s economy probably contracted in 2016 and SA looks set to have had the slowest growth since 2009.

The South African Reserve Bank, led by governor Lesetja Kganyago, may leave the benchmark repurchase rate at 7% for a fifth consecutive meeting, according to all 20 economists surveyed by Bloomberg. All 16 economists in a separate Bloomberg survey said the monetary policy committee at the Central Bank of Nigeria, headed by governor Godwin Emefiele, would leave rates at a record of 14% for a third consecutive meeting when it announced its decision.

Setting interest rates in both nations was complicated for most of 2016 by above-target inflation and poor economic performance. Low metal prices, weak global demand and a drought probably cut expansion in SA to the lowest since a 2009 recession, according to government estimates. The Nigerian economy may have shrunk by 1.5% because of low oil prices and a fall in production, according to the IMF. This would be the first full-year contraction in more than two decades as government revenue was cut by half.

“We think they will hold rates,” John Ashbourne, an economist at Capital Economics in London, said by phone on Monday. “In both cases growth is low and inflation is higher than policy makers would like. But while it’s prices of petrol and food that are driving up inflation in SA, in Nigeria, it’s a weak currency.”

SA’s inflation quickened to a 10-month high of 6.8% in December as the cost of food surged. Price growth and the uncertainty of how US President Donald Trump’s policies will affect capital flows into emerging markets will be talking points at the monetary policy committee meeting, according to Jeffrey Schultz, a senior economist at BNP Paribas Securities in Johannesburg.

Inflation expectations

“Inflation expectations have been hovering close to 6% for quite some time now and they are going to want to see these numbers moderate quite significantly back toward that 5% level over the coming quarters to warrant any change in their view,” Schultz said by phone.

After its November meeting, the monetary policy committee indicated that whereas it could be nearing the end of a tightening cycle, the inflation trajectory was uncomfortably close to the upper end of the 3%-6% target range, and that could call for reassessing monetary policy. Food costs, higher oil prices and the value of the rand were risks to the outlook, Kganyago said in a January 17 interview.

According to IMF forecasts, the economies of both SA and Nigeria may expand 0.8% this year.

The Nigerian naira lost about one third of its value against the dollar after authorities removed a currency peg in June to allow the foreign-exchange rate to be market-determined. The central bank continued to block the purchase of dollars from the inter-bank market for the imports of 41 items it deems nonessential, which forced importers to buy dollars at rates about 30% more expensive on the black market, and caused inflation to accelerate to an 11-year high of 18.6% in December.
“We expect that inflation probably has peaked,” Ashbourne said. “The naira will have to be weakened further this year, but the fall is unlikely to be as strong as the one seen in 2016.”

Vice-President Yemi Osinbajo said at the World Economic Forum (WEF) in Davos last week that the disparity between the official and parallel exchange rates was concerning, and authorities were considering further adjustment to the foreign-currency policy to close the gap. While Finance Minister Kemi Adeosun has for months called on the central bank to reduce rates in order to support growth, Emefiele has insisted monetary policy alone cannot increase economic growth without measures such as boosting industrial output.

“Since the committee feels that its own ammunition is practically exhausted, we do not see a change in the policy rate until the expected marked decline in inflation,” Lagos-based investment bank FBNQuest said in an e-mailed note by authors including Gregory Kronsten, Olubunmi Asaolu and Chinwe Egwim.

[Bloomberg]

 

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