MPC May Abort Hawkish Monetary Stance To Tame Inflation

The Central Bank of Nigeria (CBN) has said, it will continue with its orthodox monetary policies to ensure that inflation in Nigeria is brought down to single digit even as there are indications that the era of hawkish monetary stance may be on hold for this year.

Although, many analysts are of the view that inflationary pressures still abound despite the rebased inflation figure of 24.48 per cent, the monetary policy committee of the CBN see it as reflection of the present reality.

Thus, in line with expectations, the 12-man MPC had, at its meeting last week, unanimously voted to hold the Monetary Policy Rate (MPR) constant at 27.50 per cent marking the first pause in rate increases since May 2022.
Driven by an optimistic inflation outlook naira stability and the steady reduction in PMS prices, the Committee had voted to keep all other parameters unchanged.

To his end, the Cash Reserve Requirement (CRR) for Deposit Money Banks (DMBs) and Merchants Banks were left unchanged at 50 and 16.0 per cents respectively while the asymmetric corridor remains around the MPR at +500bps/-100bps and the liquidity ratio at 30 per cent.

Speaking at the end of the 299th meeting, the CBN governor, Olayemi Cardoso noted that, the committee had been satisfied with the macroeconomic developments which are expected to positively impact price dynamics in the near to medium term.

According to him, the rebased Consumer Price Index by the National Bureau of Statistics (NBS) which reviewed the weights of items in the consumption basket to reflect present realities, adding that, “what we have is a CPI which is more reflective of reality of consumption patterns. And that’s a good thing. For example, the previous one that we had actually took account of black and white television which we all know is no longer relevant. So to that extent, really, one, commends the efforts of the NBS in bringing the numbers to greater reality.”

While analysts say the rebased inflation figure does not necessarily mean a slowdown in inflation which printed 34.8 per cent in December last year, the general consensus is that the committee my begin to consider cutting interest rate by its next meeting billed to hold in May.

Benchmark interest rate had not seen a cut since September 2020 as monetary policy makers had in a race to curb rising inflation had since the last quarter of 2020 adopted an hawkish stance. The likelihood of a cut was also hinted by the CBN governor who noted that the orthodox monetary policies which the apex bank had embarked on had begun to yield fruit.

“Obviously, as that happens, we are in a better position to begin the process of moderating rates because stability is very important, and if investors do not see stability, they do not come to those markets. So our own objectives have been and will continue to be to achieve stability in the foreign exchange markets and the financial markets. That’s our objective. And as long as that happens, we are confident that we will begin to see more investments coming in, which should spur the badly needed growth.

“We will continue with the Orthodox monetary policies that we have embarked upon. We have seen the outcome and are in a positive direction, and we will stay that course. We will certainly stay that course. We will be vigilant.

We will not take anything for granted. We believe that inflation has been too high for too long. So our objective in the medium to long term is to ensure that we are able to bring this down from the double-digit to the single,” he stated.

To analysts at Cordros Research, future MPC decisions will be primarily influenced by developments in the foreign exchange market and the inflation trajectory. To them, “we believe inflationary pressures have begun to ease and will continue to moderate in the near term, supported by naira stability and a decline in energy prices. We expect subsequent data under the new CPI to offer more precise insights into underlying trends. While a potential rate cut could be considered at the May policy meeting, we expect a measured approach aimed at balancing exchange rate stability with the anticipated dis-inflationary process.”

Analysts at Cowry Assets Management Company Limited noted that, from a policy standpoint, the rebased inflation figures present a new challenge for Nigeria’s monetary authorities. In an emailed note, the analysts noted that the adjusted CPI framework has had a marked impact on real rates of return, potentially improving market sentiment in the short term.

“However, the sustainability of this inflation trajectory remains uncertain, particularly as upcoming policy shifts, such as the recently approved 50 per cent increase in telecom tariffs, could exert renewed price pressures. Cowry Research notes that while the sharp decline in the rebased CPI figures might have warranted a rate cut, the MPC opted for a cautious hold to fully assess the trajectory of inflationary pressures, particularly from food prices.

“Given that global inflation remains a key concern for central banks, the committee highlighted the importance of fiscal discipline, exchange rate stability, and structural reforms to boost domestic production and address supply-side constraints.

“In terms of implications, the pause in rate hikes is expected to result in lower yields in the fixed-income market, driven by market expectations of possible rate cuts in the upcoming MPC meeting. Post-MPC decision, the secondary market was predominantly bullish on Thursday, with the average yields of treasury bills and bonds declining to 20.21 and 19.79 per cents respectively, from pre-meeting yields of 21.96 and 19.92 per cents,” they pointed out.