MPC: CBN to Infuse Aggressive Policy as Macros Worsen
Experts are seeing a more aggressive policy with a 50 basis points rate hike as the Central Bank of Nigeria (CBN) monetary policy committee sets to meet Monday to deliberate on the next line of actions following economic and market development after the last meeting held in March 2022.
The CBN policy direction, however, appears unclear as a slew of investment banking firms differs over the possible outcome of the monetary policy committee meeting. The only decision that analysts are sure of is a reduction in the monetary policy rate.
Macroeconomics indicators have worsened since the last meeting held by the monetary authority amidst the fast and furious hawkish pose by the United States Federal Reserve rate hikes and other related external factors.
The United States Fed has booked two interest rate hikes (25 and 50 basis points) since March while the Central Bank of Nigeria policy committee maintained the status quo on benchmark policy since 2020 despite inflation pressures.
Overall, Nigeria’s monetary authority has failed across the board in keeping price level stable and maintaining a strong local currency among others core objectives. Section 12 Sub-sections (1) to (5), CBN Act of 2007 (Amended) saddled the monetary authority with the responsibility to maintain Nigeria’s external reserves to safeguard the international value of the legal currency.
In April, headline inflation rose by 90 basis points to 16.82% year on year, the highest reading in eight months from 15.70% in March amidst insecurity in Nigeria. The apex bank had attributed Nigeria’s galloping inflation to disruption in the supply chain following a covid-19 outbreak in 2020.
Other frontiers and emerging markets raise interest rates to combat hot adjustments in price levels. But, CBN retains a dovish stance, keeping rates while watching market dynamics unfolding. Afrinvest Limited said in a report that the investment firm is expecting a major policy shift due to elevated pressures from both external and domestic macroeconomic standing.
The firm recalls that at the committee meeting in March, four out of ten members voted for a rate hike, three for 25 basis points and one for 50 basis points hike respectively, marking a major shift in the trend seen in a year. Analysts said the hawkish tone of global Central Bankers is expected to have significant impacts on financial markets with borrowing costs likely to increase.
“We believe this could bring about a tremendous strain on government finances in the long run, compounding concerns over debt sustainability”. Citing the commitment of global central banks to kike rates, analysts at Afrinvest said the elevated pressures and weak domestic buffer pave way for a possible rate hike.
In a review, Cordros Capital attributed the surge in April inflation reading to price pressures which primarily reflect the pass-through impact of higher global gas and energy costs and increased food demand associated with the Ramadan and Easter festivities.
The Bureau of Statistics data showed that food prices rose by 18.37% year on year, outpacing 17.20% reported in March. Meanwhile, the core inflation spiked 26 basis points to 14.18%, advanced to the highest level since April 2017 when it printed at 14.75% year on year, analysts at Cordros Capital revealed in its market report.
Rising above the tide, consumer prices increased by 1.76% in April, outpacing March1.74% print on a month-on-month basis. Projecting into the coming month, analysts said they expect the headline inflation to maintain its uptrend in the month of May. They anchored the hotter forecast to the impact of the ongoing planting season, lingering energy prices, and unfavourable base from the prior year.
“We expect the headline inflation to settle at 1.65% month on month in May, with the corresponding base from the prior year translating to a 74 basis points increase in the year on year inflation rate to 17.56%”, Cordros Capital stated. Also, analysts at Afrinvest Limited see an inflation rate print of 17.33% with an expectation of a 1.45% month on month increase in May 2022.
Ahead of the monetary authority decision, analysts said they envisage the “reactive function” of the Committee will be significantly challenged at this meeting, given the hawkish chorus among global central banks and unabating domestic inflationary pressures amidst the lingering Russia-Ukraine conflict.
“We suspect the Committee would retain the MPR at 11.5% alongside other monetary policy parameters, given the CBN’s preference for its unorthodox policies. READ: Investors’ losses widen as weak “macros” fuel negative sentiment
“Besides, we think considerations about the implications of a rate hike on the domestic interest rate environment may prompt the majority of Committee members to push back a rate hike until the next policy meeting in July.
“However, we do not rule out the possibility of a 50 basis points hike in the MPR given the hawkish rendition among global central banks and the indirect impact of the Russia/Ukraine crisis on domestic inflationary pressures”, Cordros Capital said.
MPC had expressed concern over the unabated rising trend of domestic prices and the need for monetary and fiscal policies to push down prices via financing productive ventures, which are expected to boost aggregate supply.
The committee reviewed innovative efforts to maintain exchange rate stability, especially the incentives to attract diaspora remittances into the country. MPC felt that the lifting of restrictions associated with the COVID-19 pandemic, and the strong recovery of aggregate demand have continued to pose a strong upside risk to inflation, as supply bottlenecks persist.
It has been further aggravated by sanctions imposed on trade with Russia and other blockages associated with supplies from Ukraine.
“We note that the final decision of the Committee from its upcoming 285th meeting would chiefly be driven by the major challenges of taming the rising inflation, maintaining exchange rate stability, and sustaining growth recovery in the economy while focusing on the downside risks associated with the injection of more funds”, Cowry Asset Management said in a note.
Analysts at the firm expect to see further increased inflationary pressure in the coming months due to the ongoing rainy season and the lingering effects of structural bottlenecks and insecurity.
Other factors include probable upward adjustment to electricity tariffs, the effect of higher crude oil prices on transportation costs as well a likely increase in imported food due to upward pressures on the exchange rate, the note added.
Cowry Asset analysts said they expect the committee to at least hold Monetary Policy Rate constant. Nevertheless, analysts said they do not rule out the possibility of the Committee increasing the MPR in order to further consolidate its move to stabilize the depreciating exchange rate.
#MPC: CBN to Infuse Aggressive Policy as Macros Worsen
