To tackle unresponsive inflation figures, analysts have projected a 50 basis interest rate hike by the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) as the members hold the second meeting of the year which started on Monday and ends today, March 21, 2023.
Recall that at the last policy meeting of the MPC in January, the anchor rate – the Monetary Policy Rate (MPR) – was raised for the fifth consecutive time in the previous nine months by 100 basis points (bps) to 17.5 per cent, in continuation of the apex bank’s policy onslaught against Nigeria’s high inflation rate.
However, the inflation rate has remained unresponsive to the CBN’s strategy (up 57bps since the last MPC to 21.9% y/y), largely due to the fault lines in policy transmission mechanisms, lack of synergy between fiscal and monetary authorities, and negative spill-overs from the external environment.
Analysts at Cordros Research were of the opinion that, “Suppose the evolution of events in the international and domestic scenes since the last policy meeting is anything to go by, we envisage that the MPC is now at a crossroads of navigating between the Scylla of pausing as risks of overtightening emerge and the Charybdis of hiking too much and watching the economy fall off a cliff.
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“Consequently, we lean towards a smaller hike, similar to the actions of central banks of developed economies. Accordingly, we expect the committee to increase the MPR by 50bps and retain other policy parameters.”
For the upcoming meeting, analysts at Afrinvest anticipate that the MPC might further tighten the anchor rate by 50bps to 18.0%, premising its position solely on the renewed hawkish posture of global systemic central banks, stubborn domestic inflation, and the positive but modest domestic GDP growth outlook (CBN: 2.88%, FG: 3.75%, IMF: 3.21%, Afrinvest: 2.96%).
The analysts however canvassed for the MPC to shelve its unorthodox strategy which has made its policy tools mere signalling if inflation anchoring is to be achieved.
After the moderation witnessed in December, inflationary pressures rose for two consecutive months, settling at 21.91% y/y in February (January: 21.82% y/y).
The analysts said the persistent increase in price pressures primarily reflects (1) intermittent PMS scarcity and the associated fuel price increases and (2) low food supply exacerbated by restricted access to fertilizer and high conflict incidences. Overall, in February, food prices rose by 3bps to 24.35% y/y while the core inflation moderated by 32bps to 18.84% y/y.
Consequently, they expect the MPC to express concerns about the persistent inflationary pressures, likely attributing it to supply shocks worsened by the PMS scarcity, and electricity tariff increases amid spending relating to the 2023 general elections.
They also expect the committee to express a positive outlook on prices as electioneering activities wind down. “We expect members to urge the fiscal authority to sustain real sector interventions and take decisive steps in tackling the contributory legacy factors limiting food production and distribution in the country,” they stated.
