CBN to Hike Interest Rate Again -Analysts
Godwin Emefiele, Governor, Central Bank of Nigeria

CBN to Hike Interest Rate Again -Analysts

Analysts are spewing an unpopular view that the Central Bank of Nigeria (CBN) will further tighten monetary policy in an effort to combat Nigeria’s worsening consumer price index driven in part by food inflation.

According to the statistics office, the nation’s inflation rate accelerated to 21.09% in October ahead of the monetary policy committee meeting scheduled for next week. Since May, the CBN policy committee has increased its benchmark interest rate by 400 basis points.

The raw hawkish mood has lifted lending rates in the banking sector while private sector operators battle with increased production – a situation that has been worsened by weak local currency.

The latest data on Nigeria’s unemployment rate keeps joblessness at 33.3%, though the gross domestic product has been upbeat. While policy authority taunts the uptrend in GDP as growth, a deep insight into the number indicates the economy is merely recovering from past losses.

Still, gross domestic product rallied around $450 billion whiles its nominal comparison looks a bit appealing in the naira terms due to the depreciation of the local currency. Fitch Solutions said it expects that policymakers at the Central Bank of Nigeria will hike their key rate and then leave it unchanged in 2023.

“We expect that inflation will continue to accelerate in 2022, ending the year at 22.0% year on year. Inflation will ease somewhat in 2023 but remain well above the bank’s 6.0-9.0% target range.

“Given policymakers’ recent hawkish turn, risks are weighted towards a more aggressive tightening cycle. At Fitch Solutions, we expect that policymakers at the Central Bank of Nigeria (CBN) will hike their key rate from 14.00 to 15.00%.

After two surprise rate hikes in May (150 basis points) and July (100 basis points), the Monetary Policy Rate (MPR) is already at the high point where policymakers held it from October 2016 to May 2019”.

Fitch Solutions think MPC will take the rate to a new long-term high in late 2022. Two key factors underpin this view, adding that inflation in Nigeria will remain far above policymakers’ 6.0-9.0% target range.

While food prices are the key driver of inflation in Nigeria, inflationary pressures are spreading out across the economy. Housing and utility inflation (which mostly reflects energy costs) has accelerated from 11.1% y-o-y in December 2021 to 14.6% y-o-y in June.

The surge is attributed to developments in the local economy, including electricity tariff hikes and fuel shortages. Even core inflation – which strips out food and fuel prices – has begun to rise.

Given ongoing supply-side problems – including power and fuel shortages, violence in crop-producing areas, and the sharp depreciation of the naira on the widely-used parallel market – analysts said they doubt that these pressures will ease.

“…we expect that inflation will accelerate to 22.0% by the end of 2022.

“While we think that tighter monetary policy and the more gradual depreciation of the naira will cause inflation to ease in 2023, it will remain far above policymakers’ target.

“Second, we think that policymakers at the CBN are now more focused on meeting their inflation target than in recent years”, according to Fitch Solutions note.

The CBN left policy on hold between late 2016 and early 2019, despite inflation being consistently above target, and in 2015 policymakers actually cut rates in the face of above-target inflation, though they were forced to reverse course.

In recent statements, however, the monetary authority has stressed the need to bring inflation back to within the target band.

Indeed, at their meeting in June, the only disagreement was over the size of the hike, with one member of the monetary policy council arguing for a 150 basis point hike. READ: Bond, T-Bills Yields Track Higher after Interest Rate Hike

“The council’s decision-making processes are opaque, but the breakdown of recent votes suggests that new members appointed in recent months have turned the hawkish minority into a majority”.

Fitch Solutions said the fact that President Muhammadu Buhari – a vocal proponent of low-interest rates – is leaving office in February may also be opening up more space for policy discussions.

“Our core view is that the MPR will be left on hold for the duration of 2023. Inflationary pressures in the country will begin to ease in early 2023, and we expect that policymakers will be hesitant to continue tightening in the face of a difficult global backdrop”.

By 2023, analysts indicate an expectation that the Fed will have ended its tightening cycle, the US will be facing the risk of another recession, and oil prices will be falling, adding that risks are weighted towards tighter rather than looser policy.

“If CBN policymakers are really serious about their recent hawkish turn, they may hike further than we expect in late 2022. A shift towards looser policy, by contrast, is difficult to foresee without the removal of CBN Governor Godwin Emefiele”, Fitch Solutions said. # CBN to Hike Interest Rate Again -Analysts