MPC: Analysts See Interest Rate Hike to 27.75%
This week, the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) is anticipated to raise the benchmark interest rate by 50 basis points to 27.75%, according to Cordros Capital’s pre-MPC note.
The Apex Bank announced its policy committee final meeting schedule for 25 and 26 November in notice on its website. Since the last meeting in September, inflation has taken a sharp turn upward, rising for two consecutive months due to the pronounced effects of the PMS price surge and recent flooding in food-producing areas, analysts noted.
With inflation risks firmly skewed to the upside, Cordros Capital Limited analysts expect the MPC to implement another rate hike to reaffirm their commitment to price stability, anchor inflation expectations, and achieve positive real returns.
This comes even as global economies pivot towards a more accommodative stance, analysts said in a pre-MPC note.
“Our expectation is a 50 bps increase in the Monetary Policy Rate (MPR) to 27.75%, with all other parameters left unchanged,” Cordros Capital Limited said. Analysts stated that significant impact of the hike in PMS prices, widespread flooding, and naira depreciation continues to exert upward pressure on consumer prices.
Nigeria’s inflation rose for the second consecutive month in October, climbing by 118 basis points to 33.88% year on year from 32.70% in Sept, reversing the moderation seen in July and August 2024.
Analysts noted that food inflation defied the typical relief from the harvest season, driven by sub-optimal harvest yields and elevated transportation costs, rising by 139bps to 39.16% year on year from 37.77% in Sept.
Similarly, core inflation increased to 28.37% year on year versus 27.43% in September, following a dip in the previous month, reflecting the effect of higher transportation costs and continued naira depreciation.
On a month-on-month basis, headline inflation edged higher by 12 bps to 2.64%. Cordros Capital anticipates the MPC will emphasize the persistence of inflationary pressures, reflecting the extended effects of PMS price hikes and flooding in key food-producing regions.
Analysts said the committee is likely to caution that inflation risks remain skewed to the upside, with festive-induced demand expected to intensify price pressures in the coming months.
Analysts at Cordros Capital Limited highlighted the significant improvement in FX market liquidity, which is primarily driven by the increased inflows from foreign investors following their renewed interest in the domestic capital market due to attractive Naira yields and a fairly valued local currency.
Specifically, total inflows into the Nigerian Autonomous Foreign Exchange Market (NAFEM) rose to a five-month high in October, climbing by 40.2% to USD3.04 billion from USD2.17 billion in September.
Foreign inflows surged significantly by 292.7% month on month to USD1.36 billion, with foreign portfolio investors (FPIs) contributing 86.0% to total inflows from the segment.
However, local inflows declined by 7.5% to USD 1.69 billion in Oct due to reduced contributions from the CBN (-14.32% m/m), individuals (-30.57% m/m), and non-bank corporates (-8.6% m/m).
Additionally, inflows to the NAFEM as of 15 November reached USD 2.28 billion from 1 November, with FPI inflows worth USD 991.80 million remaining robust.
Elsewhere, the FX reserves reached a significant milestone, crossing the USD40.00 billion threshold for the first time in 35 months. The gross external reserves rose 22.0% from the beginning of the year to USD 40.28 billion as of 20 November.
Meanwhile, the naira remained under pressure despite the improvement in market liquidity, as the overall supply remained insufficient to keep the naira stable. The NAFEM rate depreciated by 2.4% month on month to an average of N1,631.71/USD, compared to N1,592.89/USD in September.
So far in November, the naira has traded within a broader range of N1,685.00/USD to N1,707.50/USD, reflecting ongoing pressures, according to the firm.
“In our view, the CBN’s cautious interventions, despite the gains in reserves, underscore both a weak net FX reserve position and a deliberate effort to let the naira align with its fair value.
“We expect the MPC to note the sustained pressure in the FX market amid the efforts of the CBN to stabilize the naira, attributing it to seasonal factors.
“Furthermore, the MPC is likely to emphasize the goal of maintaining a market-reflective exchange rate.” The MPC’s communications from previous meetings have underscored their unwavering commitment to price stability, Cordros Capital Limited noted.
However, analysts stated that this mandate faces significant headwinds from persistent structural constraints in the supply chain and the recent upward adjustment in PMS prices.
“While these supply-side bottlenecks will continue to shape the near-term inflation trajectory, we anticipate the MPC will maintain a hawkish stance in line with the goal to anchor inflation expectations and achieve positive real returns to enhance the economy’s attractiveness to international capital and to support naira stability.”.
Given this backdrop, analysts forecast a further 50bps increase in the MPR to 27.75%, with the other policy parameters maintained.
