Nigeria's central bank faces hurdles on benchmark interest rate reduction

Nigeria's central bank plans to cut back on benchmark interest by the middle of this year may not materialise against the backdrop of persistent fuel shortages and sticky inflation rate, analysts have predicted.
The Central Bank of Nigeria (CBN) governor, Godwin Emefiele had last month said the regulatory bank may slash its benchmark interest rate downward from the present 14 percent by mid-year provided the country's inflation figure inches down closer to a single digit.
The West African country's inflation is currently at 15.13 percent while the price of domestic fuel consumption has gone up in some part of the country due to persistent shortages.
Also, the expected increase in government spending ahead of the country's general election next year could further boost inflationary trend as injection of huge cash into the system due to political spending could upsets inflattion projection.
“With inflation remaining sticky, it is unlikely that the CBN would want to cut rates so soon,” Gaimin Nonyane, London-based economic-research head at Ecobank Transnational Inc., said in an email to Bloomberg.
Currently, interest rate is negative comparative to inflation rate as and discourage savings and investment in money market instruments, which also have dropped significantly since the government started repaying maturing short-dated treasury bill with proceeds of Eurobond.</div>
<div>Even if the central bank decides to lower interest rate, the regulatory bank would have to cross the hurdle on the road to convey the first meeting of the Monetary Policy Committee (MPC), which has been short of few members to form a quorum.
The National Assembly has refused to confirm President Mohammadu Buhari's nomination into the board of the regulatory bank and MPC due to a lingering face-off between the two arms of government
The MPC has not been able to sit since the beginning of the year and it's not likely to meet this month due to lack of quorum.
Africa’s largest oil producer imports almost all its refined-fuel requirements because local capacity can’t match demand.
While higher crude prices have increased Nigeria’s revenue, they have also raised the cost of processed products, with the average gasoline price surging 27 percent in January from a year earlier. The resultant fuel shortages prompted retailers to increase pump prices above the official cap of 145 naira a liter, adding to inflationary pressures.
“Unless fuel pricing is resolved, bouts of fuel shortages could keep prices sticky, feeding into other items,” said Razia Khan, head of macroeconomic research at Standard Chartered Bank Plc in London.
Price growth might fall further before rising again in the second half because of election spending, Statistician-General Yemi Kale said Feb. 16. Buhari hasn’t declared if he will seek re-election in the planned February 2019 vote but attempts to appease voters may see spending increases.
Capital investments will continue as planned, and that will help the ruling All Progressives Congress win votes, Finance Minister Kemi Adeosun said in a Jan. 23 interviews. There will be no fiscal indiscipline, and no inflation attributed to such spending, she said.
Lawmakers are debating Buhari’s proposal to increase spending plans this year by 16 percent to 8.6 trillion naira, with a focus on increasing investment in roads, rail, and power.
The International Monetary Fund (IMF) forecast gross domestic product (GDP) expansion at 2.1 percent this year, strengthening the recovery in an economy that contracted for the first time in a quarter-century in 2016.
“With oil prices and production outlook appearing positive and with external reserves strengthening, the CBN has greater scope to than a year ago to reduce the policy rate,” Ecobank’s Nonyane said. “However, this would depend on how fast consumer prices fall.”