MPC: Analysts Foresee 200bps Hike In Rates

As the Monetary Policy Committee (MPC) is set to hold its second meeting of the year on 25th and 26th of March, analysts say, they expect the committee to continue with the hawkish stance it began with at its meeting last month as inflationary pressure is yet to abate.

Consumer prices have continually risen month on month with inflation reaching a 25 year high of 30.7 per cent in February compares to 29.9 per cent which it was in January and 21.91 per cent which it was in February last year.

Rising from the last MPC in February this year, the committee had voted to increase the benchmark interest rate by 400 basis points to 22.75 per cent whilst increasing the asymmetric corridor to +100bps/-700bps from +100bps/-300bps which it was previously. Also the Cash Reserve Requirement (CRR) was increased from 32.5 per cent to 45 percent while the liquidity rate was retained at 30 per cent. The decision of the committee was to curb the rising inflation.

The CBN governor, Olayemi Cardoso, in his statement, at the last MPC had voted to increase the benchmark interest rate to 23 per cent as against the 22.5 per cent that many of the MPC members voted for, the highest rate thus voted at the meeting.

His basis for increasing rate is to curb the spiraling inflation in the country and further drive investments in the country. Inflation rate in the country which has refused to abate had spiked to 31.7 per cent in February further giving reasons for a hawkish monetary policy.

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The CBN governor had noted that the post-COVID-19 fiscal support and subsequent deficit financing have created a lax financial environment, culminating in surplus liquidity within the banking system.

“This surplus liquidity has not only directly fueled inflation but also intensified pressure on the foreign exchange market due to heightened demand for foreign currency as an alternative store of value.

“It is imperative to deploy monetary policy tools to mitigate these pressures and foster price stability. Adopting a tighter monetary stance will steer us towards achieving positive real interest rates, a crucial goal to stimulate savings and investment within the domestic economy. This strategic move also holds the potential to attract the capital inflows necessary to enhance liquidity in the foreign exchange market and bolster the currency in the immediate term,” he pointed out.

Consequently analysts believe that, the meeting this week will see Monetary Policy Rate being hiked further.

According to analysts at Cordros Research, whilst the full impact of the previous interest rate hike on domestic prices may not be apparent yet, inflation risks remain prominent.

“Therefore, we believe the MPC will maintain a tight monetary policy stance to further tighten monetary conditions, reduce the negative real interest rates and anchor inflation expectations. Consequently, we anticipate a 200 basis points hike in the MPR while holding other parameters constant. 

Accordingly, we expect the MPC to push it up to 24.75 per cent while holding other parameters constant.

“We anticipate the MPC will acknowledge the stability of the naira in the forex market over the past few weeks, attributing it to recent reforms and improved forex liquidity. We expect the Committee to commend the CBN for the successful settlement of the forex backlog while also echoing the need for the apex bank to maintain its reforms and its intervention in the forex market to sustain the stability of the naira,” they pointed out.

Also, analysts at Afrinvest West Africa, whilst anticipating a 100-200bps hike at the end of this week’s meeting said “the MPC may consider that delays in rate cuts by advanced markets could heighten competition for scarce global capital in – developing markets.

To them, “In summary, we anticipate between 100 200bps rate hike next week. That said, we recommend a hold decision as a more appropriate path considering the strong interest rate hike less than a month ago. Notably, inflation is driven by monetary and structural factors. While February’s hawkish move gradually curbs worrisome money supply growth (assuming CBN maintains strong stance against unconstrained fiscal interventions and undue real sector interventions), the fiscal authorities must rise to the occasion.

“This two pronged approach is necessary to prevent excessive and ineffective utilization of monetary policy for non monetary inflation drivers. We therefore suggest urgent and sizable fiscal sided policy moves to address insecurity around farming regions, review of ineffective logistics network and poor infrastructure for food supply, as well as improved support for the Agric sector in form of access to quality and affordable inputs and tools.

“Additionally, efforts should be made to address worsening power supply, which poses challenges for both businesses and households, especially with the increasing expenses associated with generating power independently. Overall, policies to enhance productivity in a sustainable manner must be at the forefront of fiscal efforts to improve supply constraints in the economy and tackle structural components of domestic inflation.”