CBN set to tighten monetary policy in 2022

By Lukman Otunuga, Senior Research Analyst at FXTM

As inflationary pressures ease and economic growth slowly recovers, it remains a matter of
‘when, not if’ the Central Bank of Nigeria will raise interest rates in 2022.

Other central banks have already joined the global tightening train in 2021 including South Africa,
New Zealand, and Brazil among many others. With inflation across the globe rising in the face of
supply chain disruptions, higher energy prices, and improving consumer demand, financial
conditions are set to tighten as more central banks take action. As this era of easy money comes
to an end, this certainly does not bode well for emerging markets – especially those with higher
dollar-denominated debt. Tighter policy in developed economies certainly remains one of the
biggest risks to the outlook for emerging markets. When considering how Nigeria’s total public
debt stood at $87.24 billion earlier this year, this is a theme that must not be overlooked in the
new year.

Market expectations remain elevated over the Federal Reserve speeding up tapering and re-
evaluating the timings of future interest rate hikes. There is a risk of a potential domino effect
with the Fed’s eventual rate hike accelerating the shift towards monetary tightening across the
globe. Traders are currently pricing in a 72% probability of at least one rate hike by early May
2022 and a 100% probability by mid-June next year. This comes after the U.S. consumer price
index for November jumped 6.8% year-on-year, overtaking the 6.2% increase in October which
was the highest level seen since 1982.

For Nigeria, the question remains whether higher interest rates are the right medication for the
country’s ongoing illness. Higher interest rates may support the Naira and control inflation which
fell for the seventh straight month in October. However, such a move could also discourage

business investment and consumption at a time where the country remains on a fragile road to
recovery. So, the question is whether the CBN will raise rates to help the Naira or raise rates to
prevent from being behind the curve. Whatever the decision, it will certainly have an impact on
Nigeria’s economy which is projected to expand 2.7% in 2021, according to the International
Monetary Fund (IMF).

Looking beyond monetary policy, other themes that are likely to impact Nigeria’s growth revolves
around oil prices and the Omicron menace. Oil prices recently secured their biggest weekly gain
since August despite ongoing uncertainty revolving around the Omicron variant. WTI and Brent
are both up over 45% since the start of 2021. However, expectations around oil markets
returning to oversupply in the coming months may cap upside gains. With the Omicron variant
threatening global demand and OPEC+ moving ahead with its planned January oil output rise of
400,000 bpd, oil remains vulnerable to downside losses. Given how a handsome chunk of
Nigeria’s export earnings and government revenues are sourced from oil sales, falling oil prices
could threaten the country’s economic outlook.

In regards to Covid-19, Omicron cases are rising with the United Kingdom banning travel from
Nigeria. Other countries have taken similar steps in an effort to contain the more contagious
variant. While it may be early to gauge the economic impacts, it may be wise to keep a close eye
on how this will impact relations moving into 2022. Nevertheless, the threat of new Covid-19
variants remains a major risk that could derail the global economic recovery. It's worth keeping in
mind that the pace of vaccine rollouts was the main driver behind the positive economic
forecasts. However, the risk of more aggressive vaccine-resistance Covid-19 variants poses a
serious risk to developed and developing economies. It will be interesting to see how Nigeria
fares in 2022 as it juggles domestic and external risks.

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