“Something Much Bigger”: Analysts Give Simple Conditions to Ending FX Challenges, Inflation

• Experts from Goldman Sachs assert that the continuous depreciation of the naira is aggravating inflation in Nigeria
• The Monetary Policy Committee is being urged by experts to raise interest rates by more than 100 basis points
• In order to address the ongoing weakening of the naira, analysts also encouraged the central bank to adopt a more tangible plan

Legit.ng journalist Zainab Iwayemi has over 3-year-experience covering the Economy, Technology, and Capital Market.

Goldman Sachs experts claimed that Nigeria's inflation was being exacerbated by the naira's ongoing depreciation.

The experts are pushing for more than a 100 basis point increase in interest rates by the Monetary Policy Committee.

According to a Bloomberg article, the largest economy in Africa has seen little to no reduction in inflation, and the MPC would need to make a sizable rate change to significantly affect inflation.

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Andrew Natheny, an economist at Goldman, said:

“Nigeria would need to do something much bigger, much bolder, much more decisive if the central bank wants to arrest inflation and change the mindset of foreign investors. Another 50 or a 100 basis points is certainly not going to move the needle in the eyes of an investor,” Matheny said.

“Developments since the last meeting have definitely been hawkish; inflation has not really slowed at all,” noted the Goldman Sachs Group Inc. economist. “Most importantly, the naira has weakened once again. And that’s obviously inflationary. So all of that points to the CBN staying on the hawkish side.”

The naira has fallen about 6% vs the dollar since mid-June, and inflation has accelerated to 34.2% last month from 34% in May. As a result, the central bank sold dollars to local foreign exchange bureaus to help ease the domestic shortage of US currency.

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More concrete plan needed

Many analysts predict that the Central Bank of Nigeria will conclude its aggressive tightening campaign soon and raise interest rates one last time to boost the naira and curb inflation, which is close to a three-decade high.

The 12-member monetary policy committee, headed by Governor Olayemi Cardoso, is expected to hike interest rates by 75 basis points to 27%, according to the consensus estimate of six analysts surveyed by Bloomberg.

Analysts also urged the central bank to implement a more concrete strategy to address persistent naira weakness.

This should be expressed and shown by the CBN being a more regular and active player in the foreign exchange market, according to James Marshall, senior portfolio manager at Promeritum Investment Management LLP.

Nevertheless, experts predict that a raise on Tuesday will terminate the MPC's cycle of tightening, which began in May 2022 and resulted in a 14.75 percentage point increase in rates.

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Yvonne Mhango, Bloomberg Africa economist, said:

“In order to cement inflation’s slowdown and hasten the restoration of positive real rates, the central bank will likely implement one final rate hike in July.”

This is due to the expectation that inflation will begin to decline in July, which will be aided by favourable comparisons with the previous year and food-related policies like the creation of a 180-day window for duty-free imports of wheat and corn.

Additionally, they predict that the naira will remain stable at its current level with the help of anticipated dollar inflows, reducing inflationary pressures.

Speaking on the development, Charles Abuede, a financial analyst told Legit.ng that this is subjective and can be based on certain assumptions and expectations. He stressed that this does not mean to say it is not achievable.

"I think the onus lies on the monetary and fiscal authorities to put in place friendly policies to aid the management of the fx market."

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IMTOs receive highest dollar inflow in 6 years

Legit.ng reported that as a result of the Central Bank of Nigeria's (CBN) recent reforms, dollar inflows into Nigeria through International Money Transfer Operators (IMTOs) rose to the greatest level in at least six years.

According to a BusinessDay examination of statistics from the CBN's most recent quarterly statistical bulletin, dollar inflows increased from $771 million in 2023 to $1.07 billion in the first three months of this year, a 39% increase.

Moreover, it increased from $965.3 million in Q4 on a quarter-over-quarter basis.

Proofreading by Nkem Ikeke, journalist and copy editor at Legit.ng.

Source: Legit.ng