Nigeria's Base Rate Loses Bite as Stealth Tightening Takes Hold

(Bloomberg) -- Nigeria’s base interest rate is becoming more and more irrelevant.

That’s the view of some analysts after the Monetary Policy Committee in Africa’s biggest oil producer held its key rate for the 14th straight meeting on Thursday, despite inflation being above its target range of 6 percent to 9 percent for more than three years.

Central bank Governor Godwin Emefiele is instead using money-market instruments to rein in liquidity and protect the naira, according to Ecobank Transnational Inc. Known as open market operations, they’ve become an especially important monetary tool ahead of a presidential election in February, with incumbent Muhammadu Buhari, who seeks another term, trying to stimulate an economy that’s struggled since oil prices crashed four years ago.

“The central bank wants to do more indirect tightening,” said Kunle Ezun, an analyst at Ecobank in Lagos, Nigeria’s commercial capital. “They are using OMOs as we move into election time. The monetary policy rate seems to have lost its potency. There is no more liquidity in the MPR.”

Many banks have moved to using three-month T-bills or the interbank market as benchmarks for their lending rates, he said.

The movement in naira yields reflects the central bank’s tightening. One-year interbank rates have surged almost 500 basis points since May to 16.87 percent. That’s above the MPR, which has been kept at 14 percent since July 2016.

Nigeria's Base Rate Loses Bite as Stealth Tightening Takes Hold

The good news for Emefiele is that his methods seem to be working, as least as far keeping the naira steady and lowering the inflation rate are concerned. The currency has barely budged since the emerging-market rout began about six months ago. South Africa’s rand has weakened 10 percent against the dollar in that time. And while inflation is still high at 11.3 percent, it’s decelerated from 15.1 percent in January.

Much of that is “a result of OMOs being issued by the central bank to pull liquidity out of the system, even if the official policy rate remains unchanged,” said Christopher Dielmann, an economist at Exotix Capital in London. “While the rate of disinflation might be faster under tighter monetary policy, it would come at the expense of further reducing private-sector lending and economic growth.”

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