Financial experts have projected that the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) will significantly increase the monetary policy rate by 150 to 200bps while leaving other parameters constant.
The MPC is scheduled to convene on February 26th and 27th, marking its inaugural meeting for the year and the first for the current CBN governor, Yemi Cardoso, following two postponements in the latter half of 2023.
This will also be the first session of the newly constituted committee since the change of guards at the Central Bank of Nigeria (CBN).
Recall that at the last policy meeting of the MPC in July 2023, the anchor rate – the MPR – was raised by 25bps to 18.75%, in continuation of the apex bank’s policy onslaught against Nigeria’s high inflation rate.
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However, the inflation rate has remained unresponsive to the CBN’s strategy (up 582bps since the last MPC to 29.9% y/y), largely due to a lack of synergy between fiscal and monetary authorities, and the faulty lines in policy transmission mechanisms.
Analysts at Cordros Research noted that their projection is for a significant increase in the monetary policy rate by 150bps while leaving other parameters constant.
The anticipated increase in the policy rate would be in contrast to the prevailing global trend, where many central banks are scaling back on rate hikes and contemplating reductions.
According to the experts, “Although the last MPC meeting was held in July 2023, there has been a significant increase in interest rates in the fixed-income markets towards the inflation rate, signalling the CBN’s hawkish stance against inflation.
“The CBN has issued OMO seven times in five months to mop up excess liquidity in the system. In recent primary market auctions, the apex bank has over-allotted markets, particularly in the Treasury bills market, pushing interest rates to record highs.
“Given these moves, the heightened level of inflationary pressures and the increased volatility in the exchange rate, we think that the MPC will maintain a hawkish stance, increasing the policy rate aggressively by 150bps in its meeting, pushing the policy rate to 20.25%.”
Similarly, analysts at Afrinvest anticipate that the MPC might further tighten the anchor rate by 100 – 200bps to 19.5% – 20.5%, premised on stubborn domestic inflation, reluctance of global systemic central banks to cut rates, and the positive but modest domestic GDP growth numbers for FY’23.
However, they canvassed that the monetary authority should also consider stemming the growth of money supply in the financial system as the broad money supply surged 76.4% y/y to an all-time high of N93.7tn as of January 2024.
They noted that the alarming growth in money supply might be detrimental to the efforts of the Apex Bank to stem the runaway inflation rate.
In all, the experts do not see the MPC keeping rates constant, given the need to incentivise liquidity mop-up to tame inflation. Hence, a “HOLD’ stance is highly unlikely.
