Analysts Urge CBN to Exercise Caution over Interest Rate Hike
The Central Bank of Nigeria (CBN) has been advised not to raise interest rates too quickly because doing so could have a domino effect on the private sector and economic expansion. Nigeria’s gross domestic product growth receded to 2.74% in the last quarter of 2023 from 3.10%, with reduced per capita income and an untamed population surge.
The CBN Monetary Policy Committee has slated its second meeting of the year for 25th and 26th of March, deviating from its usual bi-monthly meeting. The policy committee members unanimously decided to raise the monetary policy rate by 400 basis points in February, and it was last recorded at 22.75 percent.
In their separate pre-monetary policy committee note, Broadstreet analysts revealed expectations that the CBN would rather go ballistic against the nation’s ugly inflation trend. Nigeria’s 4% interest rate hike in February was an unusual development that might continue until headline inflation declines.
Noting that the apex bank projected inflation to cross 32% in March, analysts believe that even with the naira gaining traction, the monetary authority could wish to maintain consistency with a moderate interest rate hike in March.
In a note, Cordros Capital Limited stated that it expects the fight against inflation to continue this week with another rate increase. Nigeria’s hot red headline inflation rate of 31.70% in February informed the monetary authority’s contractionary policy.
Given the ongoing effects of exchange rate fluctuations on shifting market prices, consumer inflation is not expected to decrease in the second quarter of this year. In its update, Cordros Capital Limited said the full impact of the interest rate hike on domestic prices may not be apparent – a 31.70% reading indicates that inflation risks remain prominent.
Similar to the investment firms, many economists, analysts predict that the MPC will continue to pursue a strict monetary policy stance, lower real interest rates that are currently negative, and stabilize inflation expectations. The benchmark interest rate is expected to be 24.75 percent by the end of this quarter, according to Cordros Capital’s projection.
“We expect the monetary policy rate to increase by 200 basis points while maintaining other parameters unchanged,” Cordros Capital predicted. The tone of the MPC’s most recent meeting, analysts say, shows its commitment to seeing that inflation is brought down towards the target level and its intolerance for further price increases.
As one of its strategies for lowering inflationary pressures, the Committee underlined the necessity for exchange rate stability and acknowledged the considerable impact of exchange rates on domestic prices, according to the investment firm’s macro update.
Afrinvest Limited stated in its pre-MPC note that in addition to the policy rate hike’s signaling effect, the Naira has been supported by better foreign exchange inflows through a series of OMO auctions, favorable spillover effects from the recent transfer of NNPCL’s account to the CBN, and stricter regulations meant to stifle speculation.
According to separate analysts’ notes, the anticipated effect of the previous policy rate in February on inflation is yet to materialise due to impact lag. The CBN official predicted that high energy costs, the pass-through effect of exchange rates, disruptions in the food supply caused by ongoing Ramadan, and persistent insecurity would cause inflation to settle at 32.6% year over year in March.
Tracking the recent events and economic data released in the quarter, analysts highlighted that the economy remains resilient despite the heightened inflationary pressures and the paucity of foreign exchange. The nation’s purchasing manager index (PMI) suggests the economy is gaining traction having remained above the 50-point expansionary threshold.
Cordros Capital Limited stated that the lower PMI figure in February highlights industries grappling with high production costs, naira depreciation, and waning consumer demand.
Nevertheless, analysts said they expect the Composite PMI to remain above the 50-point threshold in March supported by improved forex liquidity and festivities. From 1.64 million barrels per day, Nigeria’s crude oil production declined in February to 1.54 million barrels per day. This put a strain on fiscal performance amidst a growing debt profile.
“We estimate a growth rate of 2.30% in Q1-2024, which is a slowdown from Q4-2023 gross domestic product (GDP) growth rate of 3.46%….we expect the Committee to recognize the trade-off between the policy objective of output growth and price stability”.
In its February meeting, the CBN Committee acknowledged the implications of high inflationary pressures on growth, thus supporting its decision to maintain high-interest rates to curb inflation. The monetary authority pointed out that a stable economic growth rate is unachievable in a high inflationary environment.
The devaluation of the naira, reduced food supplies as a result of harvest depletion amid insecurity in the Northern area, and higher energy prices brought on by the removal of subsidies have all contributed to the elevated rate of inflation. At the meeting this week, the committee is expected to highlight the persistent increase in price pressures due to the exchange rate pass-through, spike in energy costs, large fiscal deficit, and heightened insecurity in the food-producing region.
Afrinvest added that the MPC may consider that delays in rate cuts by advanced markets could heighten competition for scarce global capital in developing markets. “Except for the US, where inflation rose to 3.2% in February, data indicates that major economies continue to make progress in steering inflation lower. In summary, we anticipate a 100–200 bps rate hike next week,” the firm projected.
That said, Afrinvest Limited recommends a hold decision as a more appropriate path considering the strong interest rate hike less than a month ago. Analysts emphaises that inflation is driven by monetary and structural factors.
While February’s hawkish move gradually curbs worrisome money supply growth (assuming CBN maintains a strong stance against unconstrained fiscal interventions and undue real sector interventions), the fiscal authorities must rise to the occasion, Afrinvest said.
The investment firm insisted that this two-pronged strategy is required to avoid using monetary policy for non-monetary inflation drivers excessively and ineffectively.
“We, therefore, suggest urgent and sizable fiscal-sided policy moves to address insecurity around farming regions, review of ineffective logistics networks and poor infrastructure for food supply, as well as improved support for the Agricultural sector in the form of access to quality and affordable inputs and tools”.
Analysts stated that efforts should be made to address the worsening power supply, which poses challenges for both businesses and households, especially with the increasing expenses associated with generating power independently.
“In general, measures to improve supply constraints in the economy and address structural elements of domestic inflation must be at the forefront of fiscal efforts to boost productivity sustainably,” stated Afrinvest. Analysts Urge CBN to Exercise Caution over Interest Rate Hike FG attracts $30bn FDIs to Nigeria–minister
