By Chinwendu Obienyi
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) is expected to decide on a set of new tone for monetary policy direction over the next few months amid reforms taken by the new administration.
Since the last meeting in May, the Tinubu-led government with a distinctive market-economy agenda has directly and indirectly influenced many macroeconomic changes. These include the abolition of arbitraged multiple foreign exchange (forex) windows and the adoption of a market-determined forex rate, the suspension of Godwin Emefiele as CBN Governor and the removal of petrol subsidy.
Adding to these changes, the apex bank has also started nascent reforms with a review of corporate governance rules for the financial services sector and policy delineation of peculiarities of wholesale or merchant banks and commercial banks.
Nonetheless, like previous meetings, it is expected that the Committee will look to consider developments in the global and domestic economy since the last policy meeting. On the global scene, systemic central banks are signaling a peak in their interest rate hiking cycles. However, they are leaving the door open for an additional smaller rate hike in the near term.
It will also be recalled that in the domestic economy, headline inflation maintained its upward trajectory, currency pressures remain intact, and there are signs that real GDP growth settled higher in Q2 2023 after the cash crunch-induced moderation in Q1 2023. Another challenge before the MPC will be the current widening gap in the official and parallel market exchange rate.
As at 18th July 2023, the Naira depreciated significantly by 37.9 per cent to N742.93/$1 at the Investors and Exporters’ (I&E) window. The situation is understandable as foreign investors are still awaiting signals from the apex bank to clear the existing FX backlogs and possibly push market interest rates higher. Furthermore, exchange rate pressure witnessed so far also manifested in the gross FX reserve depletion of 8.2 per cent to $34.04 billion and so it is expected that committee will reiterate the need for the CBN to build up the FX reserves while maintaining its periodic FX interventions to limit volatility at the window.
Reacting to the development, Cordros Research in an emailed note to Daily Sun, said the dilemma for the committee at the meeting will remain whether to continue its rate hike or adopt a hold stance. The research based firm stated that continuous increases in the Monetary Policy Rate (MPR) at a time when non-monetary factors are the dominant upside risk to near-term price pressures will undermine economic growth.
For their part, analysts at Afrinvest Research, said, “Factually, the economy needs to rein-in inflation, disincentivise dollarization, and lure offshore capital. So, it would make sense for interest rates and the yield environment to stay elevated – or go higher”.