The first Monetary Policy Committee (MPC) meeting under Governor Yemi Cardoso will be held by the Central Bank of Nigeria (CBN) on Monday and Tuesday. Many analysts anticipate a large hike in the benchmark interest rate, which is also referred to as the monetary policy rate (MPR).
Last July, the MPC convened. The central bank has used Open Market Operations to tighten its monetary policy stance in an attempt to fight inflation since Card0so took office in September 2023.
The National Bureau of Statistics reports that the nation’s headline inflation rate increased from 28.92 percent in December to 29.90 percent in January 2024.
The schedule for this year’s MPC meetings was just released by the central bank.
Economists and analysts have been predicting the possible outcome of the meeting with considerable vigor, especially about the expected magnitude of interest rate adjustment.
“We anticipate a minimum of 300bps and potentially up to 550bps tightening of the Monetary Policy Rate, bringing it to 24.25 percent by the end of Q1-2024 (from 18.75 percent; 23.75 percent previously),” stated Razia Khan, managing director and chief economist for Africa and the Middle East at Standard Chartered Bank.
According to her, system-wide tightening measures would even be more crucial, since investors would probably be happy to see less reliance on discretionary cash reserve ratio (CRR) debits.
“To address Nigeria’s structural excess cash overhang, these should ideally be replaced by regular, predictable liquidity-draining measures. Monthly Federal Accounts Allocation Committee distribution among Nigeria’s three tiers of government now shows a pronounced boost related to FX depreciation, adding to Nigeria’s excess NGN liquidity challenges,” she stated.
“We expect significant policy tightening and the announcement of de facto system-wide tightening measures, given that January inflation accelerated to 29.9 percent year-over-year and the USD-NGN touched new highs in the parallel market today. Both actions, in our opinion, are necessary to stabilize inflation expectations and draw in more foreign portfolio investment. The near-term inflation objective will determine how much policy is tightened,” the speaker continued.
Charlie Robertson, head of macro strategy at FIM Partners UK Ltd., believes that Nigeria should tighten its monetary policy by raising interest rates, much like Zambia or Kenya has done.
He said that raising interest rates would help rather than hurt the country since fixing the value of the naira is perhaps the greatest pro-growth action the CBN can take. According to him, one-year interest rates in Zambia are two percent over inflation, while in Kenya they are ten percent above the most recent inflation report.
“It is a concern that they are 10% below inflation in Nigeria. Therefore, higher interest rates seem necessary. Because there is no correlation between the policy rate and inflation, it is difficult to determine how much the policy rate itself has to increase, Robertson stated on Thursday.
According to Oluwaseun Dosunmu, head of research at Parthian Securities, the MPC is anticipated to checkmate the pressure in the FX market and raise the MPR to at least 20 percent as a result of rising rates in the fixed-income market.
“That decision worries me, though, as a higher MPR would drive up business financing costs and lower their profitability,” he stated.
Head of Parthian Partners’ global markets Ronke Akinyemi stated: “We anticipate an increase in rates from the MPC. Inflation has increased since the MPC’s July meeting of last year. An effective strategy to counteract inflation is to increase interest rates. Additionally, the DMO has been increasing debt at rates higher than the current MPR rate, indicating that they are planning ahead of the MPC scheduled for next week.”
According to the CBN, the money supply, or M2, climbed from N64.35 trillion in June 2023 to N92.87 trillion in January 2024, a 44.32 percent rise in just six months.
