CBN Meeting: Investment Firms See Up to 100bps Interest Rate Hike
Top investment banking firms have projected that the monetary policy committee (MPC) of the Central Bank of Nigeria (CBN) will increase the benchmark interest rate at the end of the meeting scheduled for the week.
In an official note, the apex bank said the committee is set to meet on 22 and 23 July 2024, for their fourth meeting of the year. Although there is market consensus that the policy rate will be adjusted as part of an effort to anchor Nigeria’s wild inflation conditions, analysts across top investment firms differ in the projections.
To come to terms with the monetary policy decisions suitable for the moment, the MPC will assess recent developments in the global and domestic economies since the last policy meeting.
Investment analysts expect the MPC to acknowledge the growth in the oil and non-oil sectors in Q1-24 despite challenges posed by low Foreign Direct Investment, high inflationary pressures and tight financial conditions.
For the global economy, analysts at Cordros Capital Limited noted that interest rates have remained elevated. However, central banks are beginning to pivot to monetary policy easing as global inflation approaches set targets.
On the domestic front, the investment firm highlighted the resilient economic growth but still elevated inflationary pressures indicated in the further uptick in the June inflation print.
Inflation rose by 24 basis points in June to 34.19% as food prices remained elevated across the nation on the back of an untamed insecurity situation and weak harvest.
According to Cordros Capital Limited, the CBN will emphasize increased volatility in the naira; primarily due to muted foreign portfolio investments (FPI) inflows and frail FX interventions from the CBN.
“We expect the MPC to maintain a tight monetary policy stance at its upcoming meeting to reduce the negative real rate of return, manage inflation expectations, and stabilize the naira”, the firm said.
Supporting the argument for a rate hike, Cowry Asset Limited saw a slow acceleration in headline inflation over the last four months, indicating that the impact of the CBN’s tightening measures is permeating the economy. Analysts have hinted that they expect to see a moderation in Nigeria’s inflation in the second half of the year, largely due to high base effects.
“However, some downside risks to this expectation exist, as consumer prices may face further pressure from ongoing higher minimum wage negotiations between the federal government and labour leaders, significant depreciation of the Naira, and high PMS prices due to ongoing fuel scarcity, which could negatively affect transportation costs.
“We think the current inflationary pressure leaves the committee with little or no room for a rate tweak in favour of a loosening stance. Thus, a 25bps to 50bps hike in interest rates is anticipated”, Cowry Asset Limited said in a commentary note.
But analysts at Cordros Capital Limited said based on their assessment, they expect the CBN to raise the monetary policy rate by 100 basis points to 27.25% in its meeting next week.
“We expect the MPC to maintain their tight monetary policy stance at next week’s meeting. This will be hinged on the goal of ensuring price stability, reducing the negative real rate of return, managing inflation expectations, and stabilising the naira.
“However, given the slower pace of the increase in the inflation rate and an anticipated disinflation trend for the remainder of the year, we foresee a moderate increase than in previous meetings.
“Therefore, we anticipate the MPC will raise the MPR by 100 basis points to 27.25% while keeping other parameters unchanged”, Cordros Capital Limited explained its choice.
Examining the drivers of the headline inflation rate, upward pressure came from the prices of housing and utilities, which rose to 30.3% from 29.6%, and beverages and tobacco, which increased to 24.1% from 23.3%.
In contrast, prices eased for clothing and footwear, dropping to 16.4% from 16.6%, and recreation and culture, which declined to 9.1% from 9.5%. Transport maintained the same rate of increase at 25.6%.
On a month-on-month basis, the headline inflation rate in June 2024 was 2.31%, 0.17% higher than the 2.14% recorded in May 2024, indicating that the rate of increase in the average price level in June 2024 was higher than in May 2024.
Food inflation, which constitutes a significant portion of Nigeria’s inflation basket, surged to a record high of 40.87% in June 2024, compared to 40.66% in May 2024, marking the highest level since 2005.
This surge is driven by rising prices of essential food items such as bread and cereals, tubers, fish, and oil, significantly hindered by supply-side shocks resulting from security challenges. In Nigeria, food prices have continued to soar due to factors like supply chain disruptions, currency depreciation, and the impact of climate change on agriculture.
This has made basic staples like rice, beans, and vegetables increasingly unaffordable for the average Nigerian, stretching household budgets to their limits. On a month-on-month basis, food inflation in June 2024 was 2.55%, showing a 0.26% increase compared to the 2.28% recorded in May 2024. CUTIX Gains 30% on Earnings Forecasts, Unusual Trade Volume
