Tag: cbn

• MPC retains other monetary parameters

The Monetary Policy Rate (MPR) was yesterday raised from 27.25 per cent to 27.50 per cent to curb the adverse effects of resurgent inflationary pressures on the economy, the Central Bank of Nigeria (CBN) Governor, Olayemi Cardoso, said yesterday.

The governor spoke at the end of a two-day meeting of the Monetary Policy Committee (MPC) meeting in Abuya.

He said the highest policy-making body of the apex bank came to the decision to increase the benchmark interest rate by 25 basis points on the basis of rising inflation.

Headline inflation rate had broken a two-month breather to record two consecutive monthly increases, raising alarms that price pressures remain unabated.

Consumer Price Index (CPI), which had dropped 80 basis points and 125 basis points to 33.40 per cent and 32.15 per cent in July and August respectively, resurged in September with an increase of 55 basis points to 32.70 per cent. It worsened with an increase of 118 basis points to 33.88 per cent in October.

Cardoso said: “The persistence of price pressures has adverse effects on citizens’ income and welfare,” underscoring the decision to increase the MPR by 25 basis points.

The apex bank kept other monetary parameters unchanged, with asymmetric corridor around the MPR at +500/-100 basis points, the Cash Reserve Ratio (CRR) at 50 per cent for Deposit Money Banks (DMBs) and 16 per cent for merchant banks, and the Liquidity Ratio (LR) at 30 per cent.

Cardoso reaffirmed CBN’s commitment on measures that address inflation, stabilise the exchange rate, and support economic recovery.

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The Nation had on Monday reported that the CBN might hiked the benchmark interest rate in a renewed stance against the inflationary pressures.

Cardoso however noted that while food prices remain a major contributor to inflation, improved security in the northeast is expected to boost food production. The committee also highlighted rising energy costs, including the recent hike in Premium Motor Spirit (PMS) prices, as significant factors impacting production and distribution costs.

He expressed optimism that full deregulation of the downstream petroleum sector would stabilize prices in the medium term.

He emphasised the importance of strengthened collaboration between fiscal and monetary authorities to achieve price stability and sustainable growth.

He pointed out the improvements in external reserves, driven by a current account surplus, increased remittances, and capital inflows, as evidence of effective policy measures.

The MPC stressed the need for continued surveillance of the banking sector to ensure compliance with regulatory thresholds and maintain financial stability.

Cardoso reaffirmed the CBN’s commitment to deepening financial inclusion and enhancing the effectiveness of monetary policy transmission.

On Nigeria’s Financial Action Task Force (FATF) grey list status, Cardoso projected an exit by the second quarter of 2025.

Said he: “We are enhancing regulatory frameworks, deepening international cooperation, and strengthening Anti-Money Laundering (AML) processes to meet FATF requirements”.

He also noted efforts to boost diaspora remittances, which have risen from $250 million to $600 million monthly following reforms and engagement with Nigerians abroad.

He assured that the CBN remains committed to currency stability, noting a positive balance of payments and urging Nigerians to prioritize local goods to reduce reliance on imports.

On anticipated high demand for cash during the Christmas season, Cardoso said there were plans for ad hoc measures to ensure adequate cash supply.

“We are conducting spot checks and engaging banks to address any gaps, ensuring a seamless festive season,” Cardoso said.

Most experts described the rate hike as a necessary tough decision, while calling on the government to support the monetary system with more concerted fiscal implementation.

Managing Director, Arthur Steven Asset Management, Mr Olatunde Amolegbe, said the rate hike was widely expected given the recent increase in inflation figures.

According to him, while the rate hike may have negative effect on financing cost, the resurgent inflationary pressure made it a necessary decision.

“It’s a surprise that the hike was not larger than the 25 basis points. Since inflation went up by more than 100 basis points last month, and it appears that fiscal and structural tools the government has been deploying to slow its growth will take a bit of time to deliver the desired result, most analysts expected that the hawkish stance of the MPC was going to continue in order to slow down inflation,” Amolegbe said.

Managing Director, Highcap Securities, Mr David Adonri, pointed out that the rate hike was in line with the apex bank’s commitment to price and a stitch in time.

According to him, the MPC has enough justification to continue hiking interest rate as long as real inflation rate continues to gallop with un-diminished intensity.

“If CBN allows inflation to spiral out of control, the entire economy can collapse with dire consequences for consumers and producers,” Adonri said.

He added that once the factors fueling inflation, especially insecurity and fiscal deficit, are addressed, interest rate will normalise.

He pointed out that the rate hike had a dual effect of higher borrowing costs and better yields to investors in debt assets.

Chief Executive Officer, Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, urged the apex bank to upscale its support for development finance institutions to make up for the financing challenges created by the sustained tight monetary policy regime.

He noted that several sectors of the economy need monetary and fiscal supports, not a further tightening of monetary conditions.

“It is troubling that despite the declining growth performance of many critical sectors of the economy as evidenced in the third quarter GDP report, the MPC still continued its tightening stance. The GDP sectoral performance report also revealed a glaring disconnect between the financial services sector and the real economy. The financial services sector recorded a growth of 32 per cent, while agriculture and manufacturing grew by 1.14 per cent and 0.92 per cent. “

This hawkish disposition would deepen this distortions,” Yusuf said.

President, Association of Capital Market Academics in Nigeria, Prof Uche Uwaleke, said the marginal rate increase was a signal that the CBN would completely pause or apply the brake beginning from the first quarter of next year.

He said such a pause would help to stem the rising cost of funds and negative impact on credit access so that small businesses in particular can breathe.

He noted the need for “a proper synergy between monetary and fiscal policies” in order to address observed macroeconomic challenges.

“Regrettably, headline inflation has remained elevated and even resumed northwards despite the aggressive tightening measures by the CBN. The only area where one can see the benefits of the interest rate hikes has been in the foreign exchange (Forex) market where the impact of foreign portfolio inflows has helped to stabilise the exchange rate in the official window,” Uwaleke said.

Analysts at Cordros Capital stated that the MPC’s decision to raise the MPR aligned with expectations, although the 25 basis points, the slowest pace of tightening this year, fell short of expectation of 50 basis points, despite mounting inflationary pressures.

“While reaffirming their price stability mandate, the slower pace suggests the MPC may be approaching the peak of the rate-hiking cycle, though inflation risks remain skewed to the upside. Notably, the MPC acknowledged the lagged effects of monetary policy tightening on inflation, expressing confidence that the impact of earlier rate hikes would begin to materialize by first quarter 2025,” Cordros Capital stated.

On impact of the rate hike, Cordros Capital explained that the outcome of the meeting would sustain the bearish sentiment in the fixed income market, even as there are expectations of moderate increases in yields, particularly as year-end draws near.

In the equities market, analysts said domestic equities market might react moderately to the outcome of the MPC meeting, especially as the current rate tightening cycle may be approaching its peak amid anticipation of the usual year-end rally.

“As we have previously noted, we expect continued rotation into the banks, especially as they are less affected by interest rate hikes and benefit from increased income on loans and other earning assets. We also expect investors to take advantage of any price dip in strong-performing stocks as they try to maximise alpha. Nonetheless, we reiterate that as domestic investors continue to dominate proceedings, with 90.6 per cent market share as of October 2024, sensitivity to any movement in fixed income yields will remain a downside to market performance in the medium term,” Cordros Capital stated.

• Experts predict MPC tightening of monetary policy

The Central Bank of Nigeria (CBN) is set to tighten further its monetary control in a renewed bid to moderate resurgent inflationary pressure.

The Monetary Policy Committee (MPC), the highest policy-making organ of the apex bank, begins a two-day meeting today with policy response to mounting inflationary pressure as the main agenda.

Analysts’ consensus and sources close to the apex bank were unanimous that the apex bank would increase the benchmark interest rate, the Monetary Policy Rate (MPR), in line with the bank’s avowed focus on curbing inflation and creating a stable investment environment.

The MPC, headed by the Governor of the CBN, provides monetary policies and benchmarks, which determine the direction of the financial services sector, and the economy to a large extent.

Headline inflation rate broke a two-month breather to record two consecutive monthly increases, raising alarms that price pressures remain unabated.

Consumer Price Index (CPI), which had dropped 80 basis points and 125 basis points to 33.40 per cent and 32.15 per cent in July and August respectively, restarted in September with an increase of 55 basis points to 32.70 per cent. It worsened with an increase of 118 basis points to 33.88 per cent in October.

A predictive survey indicated that the CBN may increase the MPR within a range of 25 to 50 basis points on the average, balancing concerns over costs of doing business and the need for proactive response to the renewed pressure.

Managing Director, Financial Derivatives Company (FDC), Mr Bismarck Rewane, said inflation and exchange rate trends would be the main focus of the two-day meeting.

“The decision at the meeting will be based on a nominal anchor. However, with the new inflation rate margin in October at 1.18 per cent, the committee might be prompted to tighten monetary policy again,” Rewane stated.

Cordros Capital stated that inflation risks remain high and the apex bank would hike interest rate to reaffirm its commitment to price stability, anchor inflation expectations and achieve positive real returns.

“Our expectation is a 50 basis points increase in the Monetary Policy Rate (MPR) to 27.75 per cent, with all other parameters left unchanged,” Cordros Capital stated.

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Afrinvest West Africa noted that latest Purchasing Managers’ Index (PMI) has compounded the inflationary pressures, setting the stage for inevitable rate hike.

Analysts pointed out that the MPC faces a difficult decision given the recent re-inflationary signals in major external economies, uptick in domestic price levels, weaker PMI readings, bureaucratic hindrance to Dangote’s supply of PMS locally, fiscal deficit build-up, and the sustained expansion in money supply.

“Notwithstanding, the Committee’s steadfast focus on curbing inflation and achieving positive real interest rate to attract foreign investment suggest that a further rate hike is imminent. Against this backdrop, we expect at least a 25 basis points increase to the MPR at the final policy meeting for the year…,” Afrinvest stated.

President, Association of Capital Market Academics in Nigeria, Prof Uche Uwaleke, said while it would have been more preferable for the apex bank to hold rate unchanged, there were indications the CBN will likely raise interest rates again.

Citing increase in both core and food inflation as well as rural and urban inflation, Uwaleke noted the widening gap in the negative real interest rate.

“Against this backdrop, I will not be surprised if the MPC further jerks up the MPR by at least 50 basis points,” Uwaleke said.

At its September meeting, the MPC had raised the MPR by 50 basis points to 27.25 per cent, citing concerns over core inflation, money supply growth, fiscal deficits, and food price pressures.

The apex bank had noted that although headline inflation was trending downward at the time, core inflation remained elevated, driven by energy costs and other structural factors.

According to analysts, the significant impact of the hike in PMS prices, widespread flooding, and naira depreciation continues to exert upward pressure on consumer prices.

“We anticipate the MPC will emphasize the persistence of inflationary pressures, reflecting the extended effects of PMS price hikes and flooding in key food-producing regions. Additionally, the Committee is likely to caution that inflation risks remain skewed to the upside, with festive-induced demand expected to intensify price pressures in the coming months,” Cordros Capital stated.

Analysts stated that the central bank would also consider sustained pressure in the foreign exchange (forex) market amid ongoing efforts to stabilise the naira, thus the need to maintain a market-reflective exchange rate.

“The MPC’s communications from previous meetings have underscored their unwavering commitment to price stability. However, this mandate faces significant headwinds from persistent structural constraints in the supply chain and the recent upward adjustment in PMS prices.

“While these supply-side bottlenecks will continue to shape the near-term inflation trajectory, we anticipate the MPC will maintain a hawkish stance in line with the goal to anchor inflation expectations and achieve positive real returns to enhance the economy’s attractiveness to international capital, to support naira stability. Given this backdrop, we forecast a further 50 basis points increase in the MPR to 27.75 per cent, with the other policy parameters maintained,” Cordros Capital stated.