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Nigeria may struggle to get macroeconomic stability without more monetary tightening – Fitch

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Fitch Ratings

Fitch Ratings Inc. has underscored the necessity for Nigeria to adopt more stringent monetary tightening measures to secure macroeconomic stability.

The credit ratings and research firm highlighted the critical step taken by the Nigerian authorities with a significant adjustment in the monetary policy rate (MPR) to 22.75%, a move aimed at curbing inflation and fostering a more market-oriented exchange rate system.

Despite these efforts, concerns remain regarding the real interest rates, which continue to be negative, and the persistent downward pressure on the exchange rate.

A statement from the agency read:

The CBN also took additional measures, including raising the cash reserve ratio for commercial banks to 45% from 32.5%, aiming to tighten monetary liquidity. The widening of the asymmetric corridor around the MPR is another step to mitigate interest rate pass-through effects.

Fitch Ratings forecasts a continuance of policy tightening by the CBN in the near term, which is deemed necessary to rein in inflation effectively. The rapid growth in credit and money supply indicates a monetary environment that is still too lax, necessitating further tightening to move towards stability.

However, the implementation of these policies is not without challenges. Political pressures and the complexities of the economic environment may act as significant hurdles to effective policy enforcement, according to Fitch.

The agency noted:

Fitch expects inflation rates to escalate further in the first half of 2024 before seeing a reduction in the latter half of the year. This projection is partly established on base effects and the anticipation that the Naira’s depreciation rate will decrease, stabilising towards the end of 2024.

The depreciation of the currency since mid-2023, coupled with a delayed monetary policy response, has heightened inflation expectations. Factors such as security concerns in northeastern Nigeria and increased transportation costs also contribute to the inflationary pressures.

It noted:

 

 

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