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By Chinwendu Obienyi
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), rise from its 150th meeting with a unified front to fight the raging inbflation in nthe country.
It was the first MPC meeting under the incumbent CBN Governor, Yemi Cardoso.
While the event has since gone, the effects still reveraberate across the country, with analysts holding divergent views.
Responding to the soaring inflation, escalating exchange rate pressures and rising cost of goods and services rocking Nigeria’s economy, the MPC of the Central Bank of Nigeria (CBN) opted to hike the monetary policy rate (MPR) by a substantial+400 basis points (bps) to 22.75 per cent, marking the highest level of interest rate recorded since 2006.
Additionally, there were adjustments to the asymmetric corridor and cash reserve ratio (CRR).
Explaining the motive for the decisions, the CBN Governor, who also chairs the MPC committee, revealed that members of the MPC were concerned about the persistent rise in the level of inflation which increased its commitment to reverse the trend.
Cardoso said, “Previous policy rate hikes have slowed the rise in inflationary pressure but not to a desirable extent. MPC members concluded that inflation could pose more regulatory challenges in the near and medium term if not effectively anchored”.
According to Cardoso, non-monetary factors were driving the spike in inflation. He further said that the MPC was all out to tighten money supply.
“We have a robust strategy in in place to rein in inflation. We expect that this decision will have an 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”, he said.
Yes, the decision to raise interest rates to curb inflationary pressures is commendable as it reduces the availability of credit and slows down consumer spending, creating an avenue for consumers to also save while spending.
However, this move is likely to increase borrowing costs for businesses and consumers, potentially dampening consumption activities in the short term.
The MPC’s acknowledgment of the delicate balance between stimulating growth and containing inflation reflects the complexity of the macroeconomic landscape, where rising inflation threatens to erode purchasing power and exacerbate socio-economic disparities.
The recent monetary policy tightening is expected to have implications for Nigeria’s fixed income market. Given the hike in the MPR and adjustments to the CRR, investors may reevaluate their portfolio allocations, shifting towards higher-yielding assets to offset the impact of rising interest rates.
Meanwhile, regulatory measures aimed at mitigating excessive FX exposures and enhancing transparency in FX transactions are poised to strengthen the resilience of Nigeria’s financial system and support macroeconomic stability.
Also, the exchange rate remained a front burner topic and featured in the MPC deliberations.
Although the CBN temporarily halted FX interventions in 2023, recent actions, including the injection of $180 million into the NAFEM window, signify a renewed commitment to stabilizing the exchange rate and addressing FX repatriation challenges.
The clearance of $2.4 billion in FX claims underscores the importance of resolving backlogs and enhancing liquidity to bolster investor confidence and foster a more predictable FX environment.
Cardoso, while fielding questions from newsmen at the end of the meeting, revealed that the apex bank paid out $400 million to identified and genuine FX requests.
“We are committed to clearing backlogs of identified and genuine requests that are pending. Just today, we paid out $0.4 billion ($400 million) to those identified and genuine FX requests. We want to continue to do so as it is not in our interest to hold back from paying those that have been identified and are genuine. FX reserves have gone up in few years and it is currently at $34 billion”, he revealed.
He further revealed that the CBN is doing all it can to track illicit flows of FX via a number of collaborations it is currently having.
However, heightened uncertainty surrounding the macroeconomic outlook, in addition to lingering concerns over policy consistency and implementation, may weigh on investor sentiment in the short term but sustained efforts to improve transparency, clarity, and policy coordination could assist with rebuilding investor trust and attract much-needed capital inflows.
Although many economic analysts have since stated that the apex bank’s monetary policy stance, was characterized by a delicate balancing act between inflation containment, but growth stimulation especially for an economy currently in surgical process, growth remains critical.
This is because as global economic uncertainties persist and domestic structural reforms unfold, the onus is for policymakers to remain vigilant and proactive in addressing emerging risks.
Cardoso noted that inflationary pressures are expected to decline in 2024 due to the apex bank’s inflation-targeting policy where it reveals that it intends to rein in inflation to 21.4 per cent.
He added improved agricultural output and the easing of global supply chain pressures would boost consumer confidence and purchasing power.
Furthermore, the CBN estimates 2024 GDP growth at 3.38 per cent, the FGN projection is marginally higher at 3.88 per cent. All these figures point to the fact that headline inflation is likely to reach a peak by the second quarter of 2024 before gradually declining, all things being equal.
Hence, an effective coordination between monetary and fiscal authorities will be crucial in navigating the country towards sustainable economic recovery and prosperity.
Reacting to the decision taken by the CBN MPC, analysts at Coronation Research, said that the decision could lead to increased demand for government bonds and NTBs, driving up yields and reshaping the yield curve in the fixed income market.
They said, “Following the MPC decision, the average FGN Bond yield increased by +80bps. Looking at the variance on the back of the previous day, average yield in the mid-curve recorded a +54bps
increase. Furthermore, the average NTB yield increased by 30bps.
It is worth highlighting that the
real interest rate (MPR – Inflation) is currently -7.1 per cent. Hence, the removal of limits on the standard deposit facility and revisions to the cash reserve
requirement framework (prior to the February MPC meeting) reflect the CBN’s efforts to fine-tune its monetary policy toolkit and promote effective liquidity management”, they said.
For their part, analysts at Cordros Research, stated that rate hike indicates the apex bank’s commitment to ensuring price stability and managing inflation expectations in the near term.
They said, “While we acknowledge the Committee’s tight monetary stance to address the elevated inflationary pressures, we think the Committee will likely opt for a “HOLD” decision at its next policy meeting to allow the current adjustments to permeate the economy while awaiting additional macroeconomic data to inform future actions”.
