Nigeria's key interest rate to remain on hold into next year

CBN Gov, Emefiele

Nigeria's central bank is likely to leave monetary policy unchanged when it meets on Friday, but will be more accommodative next year if the naira can hold firm ahead of an expected U.S. interest rate rise, a Reuters poll shows.
Some of Nigeria's emerging market peers such as South Africa have already raised interest rates to boost demand for their currencies and halt rising inflation as the dollar has gained on the back of an improving U.S. economy.
However, all 23 economists surveyed by Reuters this week expect the central bank of Africa's biggest economy to keep its main interest rate at 12 percent at a policy meeting on Friday, despite inflation quickening for the sixth consecutive month in August.
Nigeria's inflation rate is now just under the 9 percent upper end of the central bank's comfort range, with former central bank governor Lamido Sanusi credited with keeping it in check.
New central bank governor Godwin Emefiele said just after taking office in June that he would seek to gradually lower interest rates - which have held at 12 percent for nearly three years - indicating a new dovish stance.
However, the governor toned down his initial comments, saying the bank (CBN) had no immediate plans to cut rates and that it would consider it after elections next February.
Economists still see lower rates as premature but also do not expect rates to go higher.
"There is probably very limited appetite on the part of the monetary policy committee to raise interest rates further right now," said Razia Khan, head of Africa research at Standard Chartered.
In a smaller poll of 11 economists who forecast rates longer term, the consensus was that interest rates would remain on hold through the first half of next year and then be gradually reduced to 11 percent by the end of 2015. Two economists, however, saw rates rising next year.


EYES ON THE FED, OIL PRICES
At its meeting on Friday, the CBN will also take into account the U.S. Federal Open Market Committee's (FOMC) policy announcement after its meeting on Wednesday.
Markets are bracing for the possibility the Fed may signal it is ready to raise interest rates earlier than currently expected, around the middle of next year.
In a separate Reuters monthly poll, the majority of Wall Street's top bond firms see the Fed starting to raise its key interest rate from the current record low of 0-0.25 percent by the second quarter of next year.
A rise in U.S. interest rates would narrow the yield gap between U.S. and emerging markets, boosting the appeal of U.S. assets.
As major emerging market central banks now ponder whether to raise their interest rates to attract foreign inflows, Nigeria's naira currency has fallen 3.5 percent against the dollar this year.
In August, Nigeria sold a 100 billion naira ($613.9 million) bond at higher yields than it paid at a similar debt auction in July, in a bid to attract more offshore demand and compensate for rising inflation, a signal that long-term interest rates may remain high.
It sold the 20-year benchmark bond at 12.38 percent in August, up 0.24 percentage point from a month earlier. On Tuesday, the paper was trading at 12.32 percent.
Standard Chartered's Khan said the naira could be tested, particularly "given the weaker oil prices averaging under a $100 a barrel for the last two trading sessions, nervousness around the FOMC and the weaker than anticipated uptick in Nigerian inflation."
Still, Nigeria tends to enjoy a stronger naira exchange rate when crude oil trades above a $100/barrel as that lifts revenues from its oil exports and improves an already-healthier current account balance compared to its peers.
A separate Reuters poll sees Brent crude oil capped around $105.30 a barrel next year, which bodes well for Nigeria's revenues. But an increase in supply of shale oil from the United States and sluggish global demand may mean that is as high as the oil price will go.