Nigeria to Raise Benchmark Rate Until Gap With Inflation Closes

Nigeria Aims to Tame Prices With Bigger-Than-Forecast Rate Hike

The central bank remains concerned about the 460 basis-point gap between the two, resulting in negative real interest rates, Hassan Mahmud, director in the monetary policy department at the central bank, said at a briefing in Abuja, the capital. Inflation is more than twice the central bank’s 9% target.

“For as long as that gap is wider and negative, it discourages investments, particularly within the domestic economy,” Mahmud said.

Higher inflation means that yields on both short- and long-term domestic debt are negative in real terms. Nigeria sold 200 billion naira ($500 million) of 364-day bills on Wednesday at a yield of 14.84%, about 166 basis points below the benchmark rate, while the average yield of government bonds closed at 14.36% on Tuesday, according to Lagos based ARM Securities.

Mahmud said the central bank would be closely watching how its tightening policy has impacted employment, the balance of payments, external reserves and third-quarter GDP growth, which will be announced on Thursday. He said he expects the central bank to start easing once it sees the inflation “coming down below 15%, narrowing down to 12%.”

Once the inflation numbers start going down, “we expect growth to start recovering, and then we’ll start seeing supply meeting up with the aggregate demand,” Mahmud said.