Expectations are strong that the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) would announce another rate hike after their meeting on Tuesday, given that the majority of MPC members adopted a hawkish position last month.
The monetary policy rate was increased by 400 basis points to 22.75 percent at the first meeting held under Governor Olayemi Cardoso. MPC member Aloysius Uche Ordu voted for an increase of up to 450 basis points. Cardoso requested a 425 basis point hike.
Cardoso stated in his statement, “I am persuaded that the MPC must adopt an assertive stance by tightening monetary policy measures, with a medium-term inflation target of 21.40 percent by the end of 2024 in mind, given the imperative to curb inflationary pressures, which could pose social challenges and impede long-term growth prospects.”
“We anticipate another 150 basis points of tightening in this cycle, which will raise the policy rate to a high of 24.25 percent by the end of the first quarter (Q1) 2024. Our belief that all 150bps of additional tightening will be implemented in a single meeting is subject to risk, in part due to the Federal Government’s need to control the cost of debt service. But for the time being, this is our main scenario,” stated Razia Khan, managing director and head economist for Standard Chartered Bank’s Africa and Middle East Global Research.
The minutes of the February meeting, according to London-based Capital Economics, demonstrated hardline justifications for swift interest rate increases to control inflation and strengthen the naira.
It stated on Friday that “we expect this to continue at Tuesday’s meeting, with a hike of 200 basis points (to 24.75 percent)”.
The economic research group claims that there is something to cheer Cardoso about before Tuesday’s meeting.
It mentioned that the CBN declared that the import backlog of $7 billion had finally been cleared and that the naira had responded favorably, strengthening by roughly 10% to approximately 1,400/$.
“The MPC still has work to do, even with the naira’s recently found stability. In February, inflation shot up to 31.7% year over year. Even if the rate increase is relatively muted, we believe the hawks will prevail once more on Tuesday,” the business stated.
In a report released on Friday, analysts at Cordros Research emphasized that the MPC’s tone at the previous meeting demonstrated the committee’s intolerance for future price increases as well as its dedication to seeing to it that inflation is brought down to the target level.
“The impact on domestic prices is yet to materialize as prices remain elevated, even though the current measures implemented by the committee and CBN are beginning to yield results (reduced naira volatility and improved FPI inflows).”
The experts emphasized that the committee’s decision to retain a tight monetary policy stance will be supported by the need to anchor inflation expectations, tighten monetary conditions further, and support ongoing inflows of foreign portfolio investments.
As a result, “we anticipate that the MPC will increase its policy rate by 200 basis points, bringing it to 24.75 percent, while maintaining all other parameters unchanged.”
Despite unaltered floor-to-market rates, the market has reacted favorably, according to Standard Chartered Bank research. The rate on the CBN’s Standing Deposit Facility has remained at 15.75 percent due to the decrease of the corridor surrounding the policy rate.
A crackdown on cryptocurrency trading platforms and increased expectations of better USD supply on official markets have caused the spread between the Nigerian foreign exchange market and the black market to close.
Inflation in February increased to 31.7 percent year over year, with food inflation hitting 37.92 percent. “We think that further rate hikes remain likely, even though FX stabilization should eventually moderate the pace of inflation once the issues preventing offshore investors from participating in local currency auctions are resolved,” the report stated.
