Disinflation: CBN in No Mood to Cut, Extend Interest Rate –Analysts
The Central Bank of Nigeria (CBN) will be in no mood to adjust the benchmark interest rate at the monetary policy committee (MPC) meeting holding this week.
The apex bank is expected to keep rate at 26.75% on the back of improved macroeconomic indicators with twice disinflation and gross domestic product growth in the second quarter of the year.
MPC is scheduled to meet Monday and Tuesday to deliberate, and take decision on whether to adjust key rate or maintain status quo given the latest economic development and financial markets temperature.
The monetary authority past actions have often mirrored the direction of the US Federal Reserve rate adjustment as defensive strategy to stem capital flight.
However, analysts said recent development in the global scene, which saw major central banks easing monetary cycles is favourable, perhaps it reduces pressure over outflow of fund from emerging markets.
Latest data from the National Bureau of Statistic showed gross domestic product growth remains resilient, while headline inflation has decelerated for two consecutive months.
But the local currency has remained volatile despite improved FX inflows into the economy and additional support gained from US dollar domestic bonds sold to retail investors totaling $900 million.
For some economists, Nigeria’s macroeconomic data is seeing gradual improvement except for political play around pump price of petroleum, which goes deeper into food inflation movement.
According to several analysts sampled, possibility of rate hike is also thin given that inflation rate has answered to previous interest rate tightening.
‘There will be no need to rock the boat as numbers are moving favourably in line with government policy strategy to grow the economy’, senior economist in Abuja said in a chat.
Central bank will likely keep rates unchanged into 2025, according to consensus analysts on expectation that there will be no shock that would force consumer price index to reverse downtrend.
NBS report show that headline inflation rate slowed for the second consecutive month to 32.15% year on year in August, against 33.40% previously.
This annual print, 11 basis points higher than our projection of 32.04%, stemmed from slower-than-expected moderation in month on month price growth to 2.22% from 2.28% reported in July – albeit, below the 12-month average of 2.43%.
Annual food inflation eased to 37.52%, from 39.53%, reaching the lowest in seven months. Meanwhile, core inflation logged at 2.27% month on month in August, its strongest pace since March.
Consequently, annual core inflation sustained its uptrend for the ninth straight month, printing at 27.58%. This negative trend rode on the back of firm price increases in Transportation, House equipment and Utility.
“We think the Monetary Policy Committee faces a pivotal decision – either maintain current rates to allow previous hikes to fully impact the economy or continue rate increases to reinforce gains from prior adjustments owing to the elevated inflation risks exacerbated by the recent rise in PMS price.
“Our baseline expectation is for the MPC to adopt a “HOLD” stance in the forthcoming meeting, as we expect the Committee to refer to the recent decline in headline inflation, even as inflation risks are now strongly tilted to the upside”, Cordros Capital Limited said in a note.
Analysts noted that the intensification of global monetary policy easing reduces the risk of capital flight from developing markets like Nigeria, lessening the pressure for defensive rate hikes.
“We highlight the dovish signals from the CBN coming off the apex bank’s adjustment of the asymmetric corridor to +500/-100bps around the MPR”, said Cordros Capital Limited.
Experts explained that the CBN recently placed a limit on the Standing Deposit Facility (SDF) rate of 25.75% on deposits of up to N3.00 billion, with a fixed rate of 19.0% on excess deposits.
This discourages banks’ utilisation of its standing deposit facility window. As a result, fixed income yields have pared down over time due to buying interest from the local lenders.
“With these developments, we expect the MPC to keep the policy rate at 26.75% while retaining all other parameters”, Cordros Capital said.
Afrinvest Capital Limited also stated that rate cut will be premature. On the flip side, the investment firm added that additional rate hike should be off card due to cost to consumption and production activities, including government borrowings.
…. given the progress of the recent efforts at taming inflation, the committee may adopt a wait-and-see approach, to monitor price developments closely and evaluate the full effect of previous rate hikes on the economy, Cowry Asset Management Limited said in a note.
The investment firm said This cautious stance will allow the committee to assess whether further tightening is necessary or if the current policy trajectory is sufficient to maintain price stability. #Disinflation: CBN in No Mood to Cut, Extend Interest Rate –Analysts
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