Nigeria’s central bank unexpectedly cut its key interest rate to the lowest in four years to try to avert a recession in Africa’s largest economy.
Of the 10 members of the monetary policy committee who attended the meeting, seven voted to cut the rate to 12.5% from 13.5%, Governor Godwin Emefiele said in a briefing broadcast online on Thursday. The rest of the panel favored even more aggressive easing, with two voting for a 150 basis-point reduction and one for 200 basis points. That’s a swing from March, when the decision to hold was unanimous.
Only one of the four economists surveyed by Bloomberg expected the central bank to reduce borrowing costs, and the forecast was for only 50 basis points of easing.
While the cut may further stoke inflation that’s been above the target range of 6% to 9% for five years and increase pressure on the naira, it could help boost an economy that’s being battered by the plunge in oil prices and the coronavirus pandemic. Crude accounts for about 90% of exports and more than half of government revenue in Africa’s largest producer of the commodity.
Gross domestic product could contract as much as 8.9% without stimulus this year, Finance Minister Zainab Ahmed warned last week, but Emefiele said on Thursday the drop in output may even be less than the 3.4% projected by the International Monetary Fund.
Year-on-year expansion beat estimates in the first quarter on higher oil production and although GDP contracted by 14.27% quarter-on-quarter, the Emefiele said Nigeria could escape a recession thanks to fiscal and monetary measures and “if concerted efforts are sustained to stimulate output.”
Still, the central bank has been struggling to convince lenders to offer more loans to help the economy. Private-sector credit in April fell by 61% from a year earlier, according to data published by the Central Bank of Nigeria.
“The reduction is largely to give an appearance of supporting growth,” said Oluwasegun Akinwale, an analyst with Nova Merchant Bank Ltd. in Lagos. It “will do nothing to stimulate aggregate demand, as banks are more concerned about systemic risk.”