Nigeria may need to increase interest rates by at least 700 basis points before the end of the year to curb inflation that’s poised to accelerate after fuel caps were scrapped and the nation’s currency weakened, according to Bank of America sub-Saharan Africa economist Tatonga Rusike.

Inflation may quicken to 30% by the end of the year from 22.4% in May, Rusike said in an interview. That’s after gasoline prices more than doubled and the naira weakened by about 40% in June after President Bola Tinubu eliminated gasoline subsidies and eased currency restrictions.

“That will require a monetary policy response from the central bank — effectively, interest-rate hikes,” Rusike said.

The inflation rate in Africa’s biggest economy is already at an 18-year high. The central bank has raised borrowing costs by 700 basis points since May last year in a bid to curb the rising cost of goods and services. Rusike said the Abuja-based monetary authority may need to demonstrate that curbing inflation remains a priority.

Overseas investors will gauge the central bank’s resolve to tame inflation before returning to local-currency securities, Rusike said.

“If the negative real interest rate is not reversing, then it is less likely to see foreign inflows coming into the country,” Rusike said. BofA would like to see aggressive rate increases, but “it is less likely they will do such level of increases,” he said.

Nigeria needs dollar inflows to stabilize the naira, which BofA said has become undervalued. It forecasts the currency may appreciate to 680 per dollar by early 2024. The naira closed at 769.25 per dollar on Friday on the FMDQ, the local exchange for trading the currency.

Still, recent policy decisions by the West African nation are credit positive and will likely result in a rating upgrade, which investors are already pricing into the country’s dollar bonds, BofA said in a report dated June 28. Market-implied ratings from bond spreads are already adjusting faster than actual credit ratings, according to the report.

“We think structural improvements will not only deliver the B rating next year, but even further prospects of B+ within two years,” it said.

Moody’s downgraded Nigeria to Caa1 with a stable outlook earlier this year, while S&P affirmed Nigeria’s B- rating with a negative outlook. In November last year, Fitch downgraded Nigeria to B- with a stable outlook. BofA said further downgrades are unlikely.

The biggest risk to Nigeria’s credit rating being raised is the government becoming complacent on reforms, Rusike said.

Author: Anthony Osae-Brown and Emele Onu