25 July 2018 ( Lagos ) : It is interesting how the Naira has witnessed stability against the Dollar after the Nigerian Central Bank kept its monetary policy rate (MPR) unchanged at 14% in July.

There is a suspicion that a combination of domestic and external factors has obstructed the central bank from easing monetary policy. Uncertainty ahead of the 2019 elections and the threat of pre-election spending triggering demand-pull inflation may prompt the CBN to remain on standby. Externally, global trade tensions, an appreciating Dollar and prospects of higher US rates could threaten price stability. While a rate cut has the ability to stimulate economic growth in Nigeria, it may widen the divergence in monetary policy between the Fed and CBN, ultimately accelerating capital outflows.

The CBN may have a tough decision to make during the final quarter of 2018, especially when considering how the Federal Reserve is expected to raise interest rates two more times this year. If Nigeria’s economic growth in the second and third quarter of the year is solid and oil prices remain elevated, this could make the CBN’s decision easier.

Signs of easing inflationary pressures in Nigeria present a solid argument for an interest rate cut. However, a rate cut could accelerate capital outflows, especially when considering how the Federal Reserve is expected to raise interest rates twice this year. If economic growth in Nigeria builds momentum, inflation cools to single digits and oil prices remain at elevated levels, the central bank could cut interest rates the final quarter of 2018.

Source :Lukman Otunuga, Research Analyst at FXTM,

Reporting for EasyKobo on Wednesday, 25 July 2018 in Lagos, Nigeria