- Says further inflationary pressure and policy rates cut might be inevitable to pull surprises
Nigeria’s missionary journey into the fourth quarter of a year that has been heavily laden with economic uncertainties, domestically and internationally, could result in more twists from what has ensued in the previous quarters of pre-COVID-19 and at a time when the lockdowns have been eased and economic activities are beginning to pick up.
The close of the third quarter saw the central bank’s monetary policy committee, on the grounds of inflationary pressure, rate cuts dilemma, oil price slump, appreciating dollar, amongst other reasons, throw a surprise to investors and stakeholders with a 100 basis points rates cut to 11.50 per cent from 12.50, making it the second rate cut in the year.
In spite of the rate cut, however, like it has been done in other climes, analysts are of the opinion that further rate cut before the close of the year is inevitable.
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Lukman Otunuga, senior research analyst at FXTM, in a note to Business A.M., said: “The monetary policy signal is a green light for more affordable lending which could stimulate economic growth and temper recessionary pressures. However, the same green light could speed up the inflationary pressures which weigh on the economy.”
Otunuga further wrote that until now, the “CBN’s hawkish monetary policy has helped to maintain and grow the banking system’s foreign currency reserves, thus, providing the naira with a cushion against further weakness,” adding that the current weakening global and domestic economic outlook does not support a high-interest rate environment in the short term.”
On the other hand, the distortions created by the COVID-19 pandemic has seen oil price slump in the global market. This also has created an attendant effect on Nigeria and Nigerians on which the need to generate revenue for government becomes sacrosanct; hence the petrol price hike. Similarly, the hike in electricity tariff and food price increase may drag consumer spending and outstrip the economic benefits of lower interest rates.
“However, if oil prices stay depressed, foreign currency reserves and government revenues are most likely to decline. Also, low oil prices also impact the apex bank’s capacity to defend the local currency. Meanwhile, a falling naira could accelerate inflation and further weigh on economic growth. Will the final quarter of 2020 see a continuation of these headwinds, or will the economy offer a positive surprise to stakeholders? The next report on inflation, CBN’s MPC statement, the reactions from the global oil market, as well as the policy actions to curtail economic distortions will pose the answer,” he maintained.