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By Chinwendu Obienyi
Amid the ravaging insecurity, inflation and constrained consumer wallets, expectations are high as the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) will today take a decision on whether to tighten, hold or raise interest rates.
For a long time, inflation has been on the upward trajectory, weakening consumer spending and growing unemployment.
But the CBN Governor, Yemi Cardoso, has assured that the tempest will be over soon and Nigeria will return to calmer waters.
Nonetheless, the MPC in February, raised the benchmark Monetary Policy Rate (MPR) by 400 basis points (bps) to 22.75 per cent, recalibrated the asymmetric corridor around the MPR to +100/-700bps from +100/-300bps, and moved Cash Reserve Ratio (CRR) up 12.5ppts to 45 per cent. Although the full impact of the interest rate hike on domestic prices may not be apparent yet, recent inflation data (February: 31.70 per cent) indicates that inflation risks remain prominent.
According to the report from National Bureau of Statistics (NBS), inflation advanced for the 14th consecutive month by 180 bps year-on-year (y/y) to 31.7 per cent in February – a new record high in over three decades based on the CBN and NBS data. Meanwhile, data on the exchange rate showed improvement as the Naira appreciated by 12 per cent week-on-week (w/w) to close at N1,431.49/$1 at the Nigerian Autonomous Foreign Exchange Market (NAFEM) whilst it gained 6.7 per cent against the dollar to close N1,495/$1 at the parallel market, since the last MPC meeting.
Beyond the signaling effect of the hike, the naira has been supported by improved FX inflows through a series of reforms undertaken by the apex bank. These include an increase in yields on naira-denominated assets to attract both domestic and international investors and curb currency speculation, addressing FX backlogs, the incorporation of BDCs into the CBN’s foreign exchange framework, and retail sale of dollars to banks with the range of N1,300/$1-N1,400/$1.
Notably, the naira appreciated to a high of N1,453.00/$1 in the NAFEM market on the 21st of March from a closing rate of N1,560.57/$1 on the 19th of March as liquidity improved.
But analysts who spoke to Daily Sun noted that the rising inflation will be top on the agenda of the committee and that the committee might be pushed to its wit end to checkmate this challenge.
Explaining the MPC’s decision to raise interest rates last month, the CBN Governor, Olayemi Cardoso, said MPC members were concerned about the persistent rise in the level of inflation and emphasized the commitment to reverse the trend.
“Previous policy rate hikes have slowed the rise in inflationary pressure but not to a desirable extent. Members concluded that inflation could pose more regulatory challenges in the near and medium term if not effectively anchored.”
According to him, non-monetary factors were driving inflation and the CBN is targeting an inflation rate of 21 per cent at the end of the year.
He said, “We are out to tighten money supply and have a robust strategy in place to rein in inflation. We expect that this decision will have effect in the short-to-medium term. We are working with the fiscal authorities to tackle the soaring inflation so that the other side of inflation that is not within our control, can be managed better”.
Tracking the recent events and economic data released in the quarter, the economy remains resilient despite the heightened inflationary pressures and the paucity of foreign exchange. This was indicated in the Composite PMI data for January (54.5 points) and February (51.1 points), which remained above the 50-point expansionary threshold but declined.
However, the lower PMI figure in February highlights industries grappling with high production costs, naira depreciation and waning consumer demand. Nevertheless, it is expected that the Composite PMI might remain above the 50-point threshold in March supported by improved FX liquidity and festivities (Ramadan activities and Easter Celebrations).
On the other hand, domestic crude oil production (including condensates) fell to 1.54mb/d in February (January: 1.64mb/d). But looking at the international front, recent monetary policy meetings indicate a global theme of caution as central banks in advanced economies opted to maintain policy rates at stable levels at their respective March meetings, signaling no immediate plans for rate cuts.
However, some analysts are of the opinion that the MPC’s tone from the last meeting indicates the Committee’s intolerance for further price increases and its commitment to ensuring inflation is brought down towards the target level and might raise rates while some see the committee to tighten the rate with other key parameters left unchanged.
Economist and Research Analyst, Cordros Research, Esther Mayowa, noted that whilst the current measures implemented by the Committee and CBN are beginning to yield results (reduced naira volatility and improved FPI inflows), the impact on domestic prices is yet to materialize as prices remain elevated.
She attributed this to a lag effect (the time it takes for an action to yield desirable results) and other inflation-stoking factors that are directly beyond the control of the MPC, including heightened insecurity in the food-producing middle-belt region, increased smuggling of food across the border, and large fiscal deficit.
“Notwithstanding, we highlight that the need to anchor inflation expectations, further tighten monetary conditions, and support continuous FPI inflows will underpin the Committee’s decision to maintain a tight monetary policy stance. Accordingly, we expect the MPC to raise its policy rate again by 200bps, pushing it up to 24.75 per cent while holding other parameters constant”, Mayowa said.
For their part, analysts at Afrinvest, said that the MPC may consider that delays in cuts by advanced markets could heighten competition for scarce global capital in developing markets. They noted that even though they anticipate between 100-200 bps rate hike, a HOLD decision is best as a more appropriate path considering the strong rate hike less than a month ago.
