MPR: Another Hike In Benchmark Interest Rate Beckons

The Monetary Policy Committee of the Central Bank of Nigeria (CBN) is set to hold its third meeting for the year today, Monday May 20 and Tuesday May 21 2024 as analysts say they expect  the committee to rise with another hike in benchmark interest rate, as it continues to strive to curb a spiking inflation. 

Analysts said they expect another 70 to 100 basis points increase in Monetary Policy Rate (MPR) at the end of the meeting. The MPC, rising from its last meeting in March this year, had raised the policy rate by +200bps to 24.75 per cent from 22.75 per cent in February, adjusted the asymmetric corridor around the MPR to +100/-300bps from +100/-700bps previously, while all other parameters were left constant. However, for merchant banks, the CRR was raised from 10 per cent to 14 per cent in a bid to improve on bank lending and discourage the reserves for idle cash within the banking system. 

While the CBN maintained that, it is targeting getting inflation to average 21 per cent by the end of this year, operators in the real sector has argued that the continuous monetary policy tightening is stifling the economy as access to finance has become expensive. With inflation unrelenting and spiking further in April to 33.69 per cent, the CBN governor, Dr Olayemi Cardoso had mentioned in an interview with the Financial Times that the MPC, which he chairs, would do whatever is necessary to keep the soaring inflation in check. To him, “there is every indication that the MPC would do whatever is necessary. They will continue to do what has to be done to ensure that inflation comes down. Let’s face it: for a long period of time, the CBN did not embrace orthodox monetary policies. We want to go back to using an orthodox method, and it will take us to where we want to go. The apex bank has been reoriented to focus on price and monetary stability.

”With the un-abating inflation, analysts believe the MPC will be faced with a further hike in MPR.  According to analysts at Cordros Securities, inflation risks are skewed to the upside due to the volatility of the naira in the foreign exchange market and the anticipated review of the minimum wage. “Hence, we anticipate the MPC to tighten its monetary policy, albeit moderately, to manage inflation expectations, tighten monetary conditions and reduce the negative real interest rates.

Our base expectation is for a 100 basis points increase in the MPR.” The analysts noted that despite the moderation in price increases evidenced in the decline in month-on-month inflation numbers for April, “we anticipate a further tightening of the monetary policy rate. This is because a one-month data release of a slowdown in prices is not sufficient for the MPC to conclude that inflation is under control, inflation risks are skewed to the upside given that currency pressures have resurfaced and the need to manage inflation expectations given the inflationary impact of the anticipated review of the minimum wage. “Nevertheless, we anticipate a less hawkish stance primarily due to the slowdown in the pace of inflation and DMO’s reluctance to take interest rates significantly higher in the fixed-income market, given its impact on the federal government’s debt burden. Accordingly, we anticipate the MPC to raise the MPR to 25.75 per cent while holding other parameters constant.”

Similarly, analysts at Cowry Asset Management Limited noted that the committee may have little ticket for rate ruse at the forthcoming MPC meeting as several economic indicators points towards further tightening or hold stance to further allow the impact of previous rate hikes permeate the economy following the latest consumer price inflation (CPI) reading at a fresh 28-year high for the month of April 2024.

“In our view, the persistent rise in food prices comes from ongoing security concerns in food-growing regions across the country, the logistics challenges of making these farm-produces available and infrastructure deficits. The pass-through effect of currency depreciation on domestic food prices also contributes significantly to the soaring food prices as consumer pockets continue to get squeezed. 

“At its last two meetings of 2024, the committee maintained a hawkish stance to address inflationary pressures and adjusted other policy parameters to tighten monetary conditions in the economy. However, the slow year-on-year increase in headline indicators within the last two months and the month-on-month trend reversal suggest that previous rate hikes and policy changes by the CBN are beginning to take effect on the economy. 

“In the meantime, the CBN is expected to proceed cautiously with rate hikes at the next MPC meeting, potentially increasing rates by 75 to 100 basis points as part of its ongoing efforts to tighten monetary policy and control all inflation indicators. Thus, we anticipate a further slow rise in headline inflation to around 34 per cent in May 2024.”