Seven of the 10 members at the Monetary Policy Committee meeting voted to keep the policy rate at 12 percent for a 10th consecutive meeting, Governor Lamido Sanusi told reporters today in the capital, Abuja. That was in line with the forecasts of 11 economists surveyed by Bloomberg.
The military of Africa’s largest oil producer began an air and ground offensive last week against Islamist militants in the northeast after President Goodluck Jonathan imposed emergency rule in the states of Borno, Yobe and Adamawa on May 14. That may prompt additional spending, adding to pressure on inflation (NGCPIYOY)as the currency weakens.
“The recent military action in the northeast will result in additional spending,” Sanusi said. “Government spending will constitute a major risk to the inflation and exchange rate outlook, thus advising prudence in monetary policy action at this point.”
The naira has dropped 1.3 percent against the dollar since the beginning of the year, limiting the scope policy makers have to lower borrowing costs. The currency was at 158.20 per dollar as of 4:25 p.m. in Lagos, the commercial capital.
Policy EasingCalls for a rate cut have increased with Finance Minister Ngozi Okonjo-Iweala saying yesterday a reduction would boost economic activity.
“We suspect that a combination of below-trend growth and sub-10 percent inflation will pave the way for policy easing later this year,” Neil Shearing, chief emerging marketseconomist at Capital Economics Ltd. in London, said in an e-mailed note to clients.
Inflation accelerated to 9.1 percent in April from 8.6 percent in the previous month. Sanusi, who was hospitalized in Paris earlier this month for an emergency appendix operation, said inflation will probably remain under 10 percent for the next six months.
Interest rates at a record high may help to bolster portfolio inflows and foreign-currency reserves, which declined 0.8 percent to $48.5 billion in the two weeks through May 17.
The economy probably expanded 6.7 percent in the second quarter compared with 6.6 percent in the previous three months, Sanusi said, citing figures from the National Bureau of Statistics. The biggest risks to growth this year include widespread insecurity, weak infrastructure and projected heavy rains and flooding in some parts of the country, he said.
Military operations in the north “have the potential to adversely affect economic activities generally, including agricultural production and food prices as well as consumer demand,” said Sanusi.