Inflation Fighting CBN to Hike Interest Rate 50bps -Analysts
At double-digits, it is unlikely that the monetary policy committee of the Central Bank of Nigeria (CBN) will give up its inflation fighting mood too soon by keeping the policy rate on hold or reducing the benchmark interest rate.
Analysts believe such a decision could attract backlash, though monetary policy tightening appears not to be effective in curbing the consumer price index from forming an uptrend.
The monetary authority has been criticised for using wrong measures to fight inflation. Ahead of the policy committee meeting in the new week, the benchmark interest rate is expected to rise 50 basis points to 18.50%, according to analysts’ consensus.
A slew of analysts anchored their projections of monetary policy rate hike expectations on worsening inflation in the country. MarketForces Africa reported that with several interest rate hikes, monetary policy tightening may not curb rising inflation,
However, Broadstreet analysts are expressing similar opinions about interest rate direction. Nigeria’s interest rate had inched upward from 11.50% to 18% in an attempt to stop inflation from running amok.
Analysts observed that rate hikes became the ritual at the last 6 meetings where rates were on the rise by 650 basis points while the apex bank kept other parameters unchanged.
Afrinvest said the hawkish drive was first, targeted at curbing the perceived liquidity-induced demand-pull inflation and keeping up with the hawkish posture of global systemic central banks in a bid to forestall capital flow reversal.
And by extension, to mitigate the negative impact on FX illiquidity and exchange rate direction. Unfortunately, macroeconomic indicators worsened further, and Nigeria’s headline inflation has been on the ascendancy, rendering interest rate hikes misplaced tools for fighting the rising consumer price index.
Asides from the fact that global central banks are approaching the end of the interest rate hiking cycle, Cordros capital analysts said MPC has reached a point where overtightening becomes a concern
“.. we think the dilemma for the Committee at the meeting will remain whether to continue its rate hike to further dampen the rising inflation trajectory or adopt a hold stance to observe emerging developments and allow for the impact of the last rate hikes to permeate the economy.
‘ In our view, given that the end of rate hikes by systemic global central banks is in sight amid sticky domestic inflation, we think the MPC is likely to maintain a slower rate hike at this meeting”.
Consequently, analysts at Cordros Capital said in a note they are expecting the Committee to increase the MPR by 50 basis points and retain other policy parameters.
Analysts at Cowry Asset Management Limited project a slower acceleration in headline inflation to 22.5%…possible 50 basis points increase in the interest rate.
Afrinvest argued that taming Nigeria’s soaring inflation rate would require efforts beyond tightening the MPR alone.
“For instance, our analysis of domestic inflation drivers for the past three years revealed that supply-side shocks (and not the demand side) are the main drivers of the elevated price levels.
“Even in January and February 2023 when the currency in circulation and currency outside of Banks were both below 2.0% of 2022 GDP due to the liquidity crunch that characterized the ill-implemented Naira redesign policy, headline inflation rate still nudged up by 47 and 9 basis points in each of the month respectively”,
Analysts noted that pressure on food inflation rate has remained elevated since August 2019 when the FG announced the closure of all land borders to food importation from neighbouring countries.
Despite the partial reversal of the policy stance in 2021, analysts spotted that the food inflation rate continued to surge as the slack in domestic supply capacity remained huge.
Based on a balanced analysis of current dynamics in the global and domestic macroeconomic landscape since the last MPC meeting in March, Afrinvest analysts said they do not expect the CBN to retain or lower the anchor rate next week.
#Inflation Fighting CBN to Hike Interest Rate 50bps -Analysts
