Nigeria Hits Pause on Rate Hikes After Inflation Revamp

Nigeria’s Central Bank Pauses Rate Hikes as Inflation Slows

Teh Monetary Policy Committee (MPC) of Nigeria’s central bank has decided to hold its policy rate at 27.5%, marking a pause in a steep campaign of monetary tightening. This decision comes after a significant revision in the data used to calculate inflation showed a notable slowdown.

Governor Olayemi Cardoso announced the decision in Abuja, the capital, on thursday. The decision was correctly predicted by eight out of nine economists in a bloomberg survey.

“The MPC noted with satisfaction recent macroeconomic developments,” Cardoso said, highlighting the recent stability of the naira, the local currency. “The committee was unanimous in its decision to hold all parameters.”

As 2022, the MPC has raised rates by a cumulative 16 percentage points in an effort to curb decades-high inflation and stabilize the naira, which has depreciated by 70% against the dollar following currency reforms in 2023.

Inflation Cools Amidst Data Revision

The naira has stabilized since early December,trading within a narrow range of 1,470 to 1,550 per dollar. This stability, coupled with a series of changes to how inflation data is calculated, has resulted in a notable slowdown.Annual inflation dropped to 24.5% in January,a significant decrease from 34.8% recorded using the previous methodology.

The overhaul of the consumer Price Index (CPI) by the statistics agency, the first in 16 years, included changes to the reference year, reweighting of categories like food and non-alcoholic beverages, and an increase in the number of items within the inflation basket.

“What we have is a CPI that is more reflective of the reality of consumption patterns, and that’s a good thing,” cardoso said, acknowledging the importance of the data revision. “Though,members were not oblivious to the risk of persistent inflationary pressures driven largely by food prices.”

cautious Optimism and Future Rate Cuts

While anticipating further price moderation, Governor Cardoso remains cautious. “Confidence is gradually returning to our market which shows that we are on the right course,” he stated. “We can see that inflation is gradually trending down.”

According to a recent analysis by Bloomberg Economics, “Inflation will likely moderate in the first half of 2025—off a high base set by the naira’s devaluation a year earlier. This, plus the restoration of positive real rates, will likely give policymakers room to start cutting rates by the end of 2025.” – Yvonne Mhango, Bloomberg Africa economist

Analysts, such as David Omojomolo of Capital Economics, agree with the governor’s cautious optimism. “We do think he’s right that domestic factors will start to push inflation down,” Omojomolo wrote in a client note. He anticipates a 100 basis point rate cut to 26.5% at the MPC’s May meeting, with further reductions to 24.75% by year-end, supported by incoming data confirming cooling price pressures.

What this Means for Nigeria

This pause in rate hikes comes as a relief for businesses and consumers grappling with the impact of previous increases. It suggests that the central bank believes its efforts to control inflation are starting to yield results. As inflation continues to ease, the path towards interest rate reductions becomes clearer, possibly stimulating economic growth and investment.

While the governor emphasizes continued vigilance on food prices, the central bank’s decision reflects a cautious but positive outlook for Nigeria’s economic future.

How have the changes in inflation data calculation contributed to the cooling of inflation in Nigeria?

Nigeria’s Economic Climate: A Conversation with CBN Governor Olayemi Cardoso

Welcome, Governor Olayemi Cardoso! Thank you for joining us today.

Governor, the MPC has decided to pause rate hikes after the notable slowdown in inflation. Can you share with our readers what lead to this decision?

inflation Optimization and Data Revision

Your Excellency, the revision in how inflation data is calculated has greatly impacted the recent inflation figures. How have these changes contributed to the cooling of inflation?

In your view,what are the key aspects of this data revision that have provided a more accurate reflection of reality?

Cautious Optimism and the Future of Monetary Policy

Your cautious optimism about the coming months seems well-founded,given the recent market trends and economic indicators. Could you elaborate on why confidence is returning to the market?

Given this positive trajectory, what does the future hold for interest rate cuts in Nigeria? Are there specific indicators that the MPC will be watching closely?

A Word on Food prices and the Economy

While there’s reason for optimism, the MPC remains vigilant about persistent inflationary pressures, particularly those driven by food prices. How does the central bank plan to address these ongoing concerns?

Lastly, this pause in rate hikes can bring some relief to businesses and consumers. How does this decision translate to the overall economic outlook for Nigeria?