Analysts Expect CBN to Go Soft on Interest Rate Hike
The monetary policy committee of the Central Bank of Nigeria (CBN) may keep the benchmark interest rate with a mildly hawkish tone, Cordros Capital Limited said in its pre-MPC update. Since May 2022, Nigeria’s benchmark interest rate has increased 700 basis points in a bid to fight inflation.
However, headline inflation has remained untamed as analysts noted that the monetary authority is fighting winds because of misconceptions about key drivers on price instability.
The MPC meeting coming up next week is the first following the suspension of Godwin Emefiele as the CBN Governor. This time, the meeting will be chaired by the CBN’s acting Governor, Folashodun Shonubi.
“We think the focus at this meeting will be setting a new tone for monetary policy direction over the next few months, in line with the monetary policy and FX reforms since 29 May.
“Nonetheless, like previous meetings, we expect the Committee to consider developments in the global and domestic economy since the last policy meeting”, Cordros Capital said in the update.
Analysts noted that systemic central banks are signaling a peak in their interest rate hiking cycles on the global scene, adding that Central Bankers are leaving the door open for an additional smaller rate hike in the near term.
In Nigeria, headline inflation maintained its upward trajectory, currency pressures remain intact, and there are signs that real gross domestic product (GDP) growth settled higher in Q2-2023 after the cash crunch-induced moderation in Q1-23.
“Overall, while our baseline view is for the MPC is to adopt a hold stance at this meeting, we do not rule out a 25 – 50 basis points hike in the MPR while retaining other policy parameters”, Cordros Capital said.
Analysts said the domestic economy appears to have shrugged off the impact of the cash scarcity witnessed in Q1-2023 after the Supreme Court on 3 March ordered that old high-denominated notes remain in circulation until the end of 2023.
They noted that the second quarter of the year was majorly characterised by petrol motor spirit (PMS) subsidy removal and fiscal and monetary policy reforms, with the likely impact of moderating household consumption in the near term.
The update noted that the non-oil sector’s growth improved in Q2-2023 relative to Q1-2023 as the cash crunch’s impact subsided. Meanwhile, crude oil production (including condensates) averaged 1.38mb/d in Q2-2023 – 8.9% lower than the 1.52mb/d average in Q1-23 – primarily due to the strike action-induced production slowdown in April.
Based on the preceding, Cordros Capital analysts said they envisage that the oil sector likely contracted further in Q2-2023, albeit lower than the decline in Q1-2023. On a balance of factors, analysts forecast the domestic economy to have grown by 3.11% year on year in Q2-2023, higher than the 2.31% year-on-year growth recorded in Q1-2023 but lower than 3.54% growth in the second quarter of 2022.
Barring any significant economic shocks, Cordros Capital now forecasts real GDP to grow by 2.92% year on year in 2023, a decline from 3.10% achieved in 2022. Analysts said they expect the Committee to remain cautiously optimistic that domestic growth will stay on a growth path, albeit at a subdued pace.
“Hence, the Committee will likely highlight the need to strengthen output expansion and forestall the reversal of gains recorded so far by slowing down on the rate hikes and maintaining the ongoing monetary and fiscal interventions in critical growth-enhancing sectors”, the investment firm stated.
Although the pace of consumer price increases defied market expectations in June, analysts highlight that the headline inflation still increased to a new 18-year high, rising by 38 basis points to 22.79% in June from 22.41% in May. The breakdown showed that food prices increased by 43bps to 25.25% year on year, while the core inflation advanced by 22 basis points to 20.27%.
“Given that consumer price pressures are still biased to the upside as we are yet to fully see the impact of FX and subsidy reforms on prices, we expect the Committee to urge the fiscal authority to sustain its real sector interventions and take decisive steps in tackling the contributory legacy factors limiting food production and distribution in the country”.
Cordros Capital said the MPC is likely to express medium-term optimism on prices decelerating after the full impact of lingering reforms permeates into the general price level. #Analysts Expect CBN to Go Soft on Interest Rate Hike Nigerian Treasury Bills Yield Rises to 7%
