The Central Bank of Nigeria (CBN) is set to tighten further its monetary control in a renewed bid to moderate resurgent inflationary pressure.
The Monetary Policy Committee (MPC), the highest policy-making organ of the apex bank, begins a two-day meeting today with policy response to mounting inflationary pressure as the main agenda.
Analysts’ consensus and sources close to the apex bank were unanimous that the apex bank would increase the benchmark interest rate, the Monetary Policy Rate (MPR), in line with the bank’s avowed focus on curbing inflation and creating a stable investment environment.
The MPC, headed by the Governor of the CBN, provides monetary policies and benchmarks, which determine the direction of the financial services sector, and the economy to a large extent.
Headline inflation rate broke a two-month breather to record two consecutive monthly increases, raising alarms that price pressures remain unabated.
Consumer Price Index (CPI), which had dropped 80 basis points and 125 basis points to 33.40 per cent and 32.15 per cent in July and August respectively, restarted in September with an increase of 55 basis points to 32.70 per cent. It worsened with an increase of 118 basis points to 33.88 per cent in October.
A predictive survey indicated that the CBN may increase the MPR within a range of 25 to 50 basis points on the average, balancing concerns over costs of doing business and the need for proactive response to the renewed pressure.
Managing Director, Financial Derivatives Company (FDC), Mr Bismarck Rewane, said inflation and exchange rate trends would be the main focus of the two-day meeting.
“The decision at the meeting will be based on a nominal anchor. However, with the new inflation rate margin in October at 1.18 per cent, the committee might be prompted to tighten monetary policy again,” Rewane stated.
Cordros Capital stated that inflation risks remain high and the apex bank would hike interest rate to reaffirm its commitment to price stability, anchor inflation expectations and achieve positive real returns.
“Our expectation is a 50 basis points increase in the Monetary Policy Rate (MPR) to 27.75 per cent, with all other parameters left unchanged,” Cordros Capital stated.
Afrinvest West Africa noted that latest Purchasing Managers’ Index (PMI) has compounded the inflationary pressures, setting the stage for inevitable rate hike.
Analysts pointed out that the MPC faces a difficult decision given the recent re-inflationary signals in major external economies, uptick in domestic price levels, weaker PMI readings, bureaucratic hindrance to Dangote’s supply of PMS locally, fiscal deficit build-up, and the sustained expansion in money supply.
“Notwithstanding, the Committee’s steadfast focus on curbing inflation and achieving positive real interest rate to attract foreign investment suggest that a further rate hike is imminent. Against this backdrop, we expect at least a 25 basis points increase to the MPR at the final policy meeting for the year…,” Afrinvest stated.
President, Association of Capital Market Academics in Nigeria, Prof Uche Uwaleke, said while it would have been more preferable for the apex bank to hold rate unchanged, there were indications the CBN will likely raise interest rates again.
Citing increase in both core and food inflation as well as rural and urban inflation, Uwaleke noted the widening gap in the negative real interest rate.
“Against this backdrop, I will not be surprised if the MPC further jerks up the MPR by at least 50 basis points,” Uwaleke said.
At its September meeting, the MPC had raised the MPR by 50 basis points to 27.25 per cent, citing concerns over core inflation, money supply growth, fiscal deficits, and food price pressures.
The apex bank had noted that although headline inflation was trending downward at the time, core inflation remained elevated, driven by energy costs and other structural factors.
According to analysts, the significant impact of the hike in PMS prices, widespread flooding, and naira depreciation continues to exert upward pressure on consumer prices.
“We anticipate the MPC will emphasize the persistence of inflationary pressures, reflecting the extended effects of PMS price hikes and flooding in key food-producing regions. Additionally, the Committee is likely to caution that inflation risks remain skewed to the upside, with festive-induced demand expected to intensify price pressures in the coming months,” Cordros Capital stated.
Analysts stated that the central bank would also consider sustained pressure in the foreign exchange (forex) market amid ongoing efforts to stabilise the naira, thus the need to maintain a market-reflective exchange rate.
“The MPC’s communications from previous meetings have underscored their unwavering commitment to price stability. However, this mandate faces significant headwinds from persistent structural constraints in the supply chain and the recent upward adjustment in PMS prices.
“While these supply-side bottlenecks will continue to shape the near-term inflation trajectory, we anticipate the MPC will maintain a hawkish stance in line with the goal to anchor inflation expectations and achieve positive real returns to enhance the economy’s attractiveness to international capital, to support naira stability. Given this backdrop, we forecast a further 50 basis points increase in the MPR to 27.75 per cent, with the other policy parameters maintained,” Cordros Capital stated.
