Naira devaluation, two interest rate hikes expected this year

Nigeria's central bank will devalue the naira in the next few months, analysts in a Reuters poll said on Thursday, but will also hike interest rates next week and again in November to control inflation.

Central Bank of Nigeria Governor Godwin Emefiele said in March the bank would keep the naira exchange rate stable despite a sharp fall on the parallel market due to a dollar shortage. Nigeria's central bank denied a report it planned to cheapen the naira.

Yet talk of a devaluation has been rife since Vice President Yemi Osinbajo said on Wednesday the central bank needed to change its foreign currency policies to spur investment.

"(Nigeria) has again come under immense pressure to devalue the official naira exchange rate, and the probability of this happening in the near term is high in our view," said Cobus de Hart at research consultancy NKC African Economics.

De Hart listed risks such as a severe production shock, forex shortages spilling over to the monetary environment, unions becoming more vocal and growing opposition to a stable naira within government circles as pressure to devalue.

The naira traded at a record low versus the dollar in the non-deliverable forwards market on Tuesday, with markets betting on a devaluation to tackle a spiralling economic crisis.

On the official market the central bank has put in place controls to make sure the currency does not fall below 199 per dollar.

Nigerian interest rates, meanwhile, were seen rising as soon as Tuesday. As high inflation is turning real rates negative, economists expect a 100 basis point rise to 13 percent on May 24 - matching the central bank's March increase.

Another 100 basis point hike is expected in November.

Nigeria is expected to punch way below its growth potential of around 6 percent. Its economy will grow 2.5 percent this year and 3.5 percent next, the poll found.

DUAL EXCHANGE-RATE

Analysts were sceptical about saying the devaluation would be announced next Tuesday when the central bank is due to announce any changes to monetary policy, though say there may be some form of extraordinary measures.

Bismarck Rewane, chief executive of Lagos consultancy Financial Derivatives suggested the Bank could announce a dual currency exchange.

Renaissance Capital's global chief economist, Charles Robertson, said while authorities would be reluctant to float the naira they may instead introduce Venezuela-style dual-exchange rates, with an officially endorsed parallel rate around 285 per dollar.

Still, Aly Khan Satchu, an independent analyst and investor at Rich Management in Nairobi said the President had been betting the equivalent of a single number at the Roulette wheel.

"He has been betting against the curve of history: Soros, Thai baht and there are (others) too numerous to mention."

"The President needs to try and stay in charge of the process and keep it orderly, any further delay risks a disorderly and Caracas outcome," said Satchu.

Venezuela's dual-exchange rates, implemented earlier this year, has not stemmed rampant inflation that has destroyed purchasing power.