AdminRenaissance Capital Limited, a leading emerging and frontier market investment banking firm says the monetary policy committee of the Central Bank will likely raise benchmark interest rates next year to cushion steep headline inflation rate effects.
In a presentation by Renaissance Capital’s Adesoji Solanke, Director, Frontier –Sub-Saharan Africa, the firm also predicts that the Naira will hit N482 to a dollar at the investors and exporters (I&E) foreign exchange window in 2022.
Renaissance Capital (RenCap) at its recent webinar said the naira is currently 13 per cent overvalued at the window, thus projecting that the local currency could see rate adjustment next year.
RenCap’s African economist, Yvonne Mhango also estimates that a more secure growth recovery and softening inflation rate will give Nigeria a score for a 100 basis points policy rate hike to 12.5per cent in 2022.
“We believe this will help contain inflation, seen in lower double-digit and depreciating naira,” she said.
Mhango also thinks naira at the exporters and importers FX window is 13per cent overvalued, judging from Rencap’s real effective exchange rate, saying the local currency has a fair value of N473 to a dollar.
According to the firm, headline inflation in Nigeria will settle at 14.5per cent and 12.4per cent in the fiscal year 2021 and 2022 respectively following a 7-month moderation that started in April 2021.
This implies that the Central Bank inflation target of 6per cent-9per cent will remain elusive, at least for a short term, the firm added.
Citing Famine Early Warning Systems Network (FEWS NET), the investment firm said there is an upside risk to its inflation estimate for 2022, noting that insecurity and the overall conflict across the northern region is disrupting the ongoing harvest for millions of households.
It also pointed at foreign exchange depreciation, which the firm forecast to hit N482 per dollar at the investors and exporters’ foreign exchange window, remains a downside to its inflation projection.
Pressure is also expected to come from high transport costs, below-average harvest and high cost of imported goods are all downside to its inflation estimate.
“While we forecast a policy rate hike in 2022, we expect Treasury yields to remain flat with upside risk from an increase in government domestic borrowings”, it noted.
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