Bank of America sees Nigeria inflation at 30% after subsidy removal

Consumer prices in Nigeria are likely to rise by 30% by the end of the year from 22.4% in May, after petrol prices rose and the naira weakened last month, according to the Bank of America.

The bank’s sub-Saharan Africa economist Tatonga Rusike told Bloomberg that the Central Bank of Nigeria may need to increase interest rate by at least 7 percentage points (700 basis points) before the end of 2023.

The central bank raised the benchmark lending rate by 700 basis points in the last one year (from 11.5% to 18.5%), in a bid to contain Nigeria’s highest inflation in 18 years. High interest rates make borrowing costly for businesses and may depress the economy, affecting jobs.

But hikes are expected as inflation is poise to rise after President Bola Tinubu removed fuel subsidies and loosened restrictions on the naira, resulting in a nearly tripled petrol prices and a 40% depreciation of the naira. On Friday, the currency closed at 769.25 per dollar on the local exchange, FMDQ.

“That will require a monetary policy response from the central bank — effectively, interest-rate hikes,” Rusike said.

– Deal with inflation

The new government says the measures are intended to boost foreign investment, in part to bring in dollar inflows needed to stabilize the naira.

But the Bank of America economist said overseas investors will first examine how determined the CBN will be in fighting inflation to ensure their investments are protected before returning to local-currency instruments.

“If the negative real interest rate is not reversing, then it is less likely to see foreign inflows coming into the country,” Rusike said.

He said the BofA would like to see aggressive interest rate increases, but said it was unlikely the CBN will adopt that approach.

– Good nonetheless

The bank is happy with the reforms, nonetheless, saying it will likely result in Nigeria’s creditworthiness rating being upgraded.

The Bank of America expects Nigeria’s rating to rise to B next year, and possibly B+ within two years.

Moody’s downgraded Nigeria to Caa1 with a stable outlook earlier this year, while S&P affirmed Nigeria’s B- rating with a negative outlook. Last November, Fitch downgraded Nigeria to B- with a stable outlook.

It also expects the naira, which it says has suddenly become undervalued, to appreciate to 680 per dollar by early 2024.