There were concerns in the business circle yesterday that the Central Bank of Nigeria (CBN) may again raise the interest rate benchmark.
The banks highest policy making committee – the Monetary Policy Committee (MPC)—will today begin a two-day meeting to review the national economic outlook.
The MPC, which is saddled with determining appropriate stance of policy, commences a two-day meeting today at the CBN Headquarters. It’s the committee 288th meeting and the last meeting for this fiscal year.
The CBN Act saddles the MPC with the responsibility for formulating monetary and credit policy.
At the two-day meeting, the MPC is expected to review economic and financial markets outlooks, review existing monetary policy framework and consider any possible changes and guide the economy in line with the domestic and global situations.
Most analysts surveyed yesterday said the apex bank may increase the Monetary Policy Rate (MPR), the benchmark interest rate, for the fourth consecutive time this year, although the apex bank’s decision may not be as aggressive as in the previous meeting.
Analysts said the apex bank faces a tough decision between continuing its hawkish stance in the light of the recent economic data or a moderation to allow further assimilation of the policy effect of the previous hike.
At its September 2022 meeting, the MPC increased the MPR by 150 basis points from 14.00 per cent to 15.50 per cent, raising the benchmark interest rate to its highest level since adoption of MPR in December 2006. The MPC also increased Cash Reserve Ratio (CRR) from 27.50 per cent to 32.50 per cent while retaining the asymmetric corridor at +100/-700 basis point around the MPR. It also retained liquidity ratio at 30.00 per cent. The apex bank had between May and September 2022 raised the MPR by 400 basis points.
Managing Director, Arthur Steven Asset Management, Mr. Tunde Amolegbe, said the apex bank has a lot of balancing acts to consider at the last meeting of the year and it may not come to an easy decision.
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He said: “It will be a tough one this time because they will have the right to feel like the recent hikes and other policies have had the desired impact on inflation and exchange rate.
“On the other hand, the threat of imported inflation has not fully receded as other global central banks are still raising rates and the CBN might feel the need to act likewise.
“The recent downgrade of our sovereign rating by Fitch may also be a significant consideration in the decision making though the markets did not react to the downgrade as some might have expected.”
“All in all, I suspect the MPC will lean towards raising rates but may be not as aggressive as we’ve seen in the previous two meetings,” Amolegbe, a former president of Chartered Institute of Stockbrokers (CIS) said.
Analysts at Cordros Capital said they expected the apex bank to raise the MPR further by some 100 basis points to 16.50 per cent.
Cordros Capital noted that the Governor of CBN, Mr. Godiwn Emefiele, had in the last two meetings maintained that the apex bank would maintain its interest rate hikes until there is a deceleration in the inflation path. Emefiele had pointed out that “time-tested monetary policy has shown that inflation must lag policy rates”.
The National Bureau of Statistics (NBS) recently released the latest inflation figure showing that inflation rate rose by 0.32 per cent from 20.77 per cent in September 2022 to 21.09 per cent in October 2022.
Cordros Capital pointed out that inflation rate at a 17-year high has dire implication on macroeconomic stability, depressing the long-run potential Gross Domestic Products (GDP).
“Thus, we believe the MPC would march on with its interest rate hike to re-anchor inflation expectations, which an econometric study by the CBN shows is the most significant driver of actual inflation in Nigeria, according to one of the Committee members.
“Overall, we expect the MPC to raise the MPR further by 100 basis points, given the continued hawkish rendition of global central banks amid a comfortable level of domestic growth and persistent domestic inflationary pressures,” Cordros Capital stated.
Analysts said the outcome of the meeting will determine the direction of the financial markets in the days ahead.
The International Monetary Fund (IMF) at the weekend, in its latest report after an onsite assessment visit to Nigeria, stated that ensuring macroeconomic stability requires tightening across all policy levers, and stronger revenue mobilisation and exchange rate reforms.
According to IMF, decisive and effective monetary policy tightening is a priority to prevent risks of de-anchoring of inflation expectations.
Alongside other measures, the IMF advised that the CBN must “stand ready to further increase the MPR to send a tightening signal”.
Bismarck Rewane’s Financial Derivatives Company (FDC) said the apex bank might continue with its tightening policy.
Analysts at FDC stated that they expected the “the CBN to maintain its restrictive monetary policy” but “the pace of interest rate hike is expected to taper”.