Follow Us on Google
By Chinwendu Obienyi
As inflation climbs and the naira stalls amid raging economic headwinds, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) may adopt a more hawkish approach in its monetary policy today.
The stance would likely aim to tame the persistent inflation by tightening monetary policy, primarily through raising the Monetary Policy Rate (MPR), the country’s benchmark interest rate.
Since the last committee meeting in September, inflation has taken a sharp turn upward, rising for two consecutive months due to the pronounced effects of the PMS price surge and recent flooding in food-producing areas.
At its September meeting, the Committee raised the Monetary Policy Rate (MPR) by 50bps to 27.25%, accentuating concerns over core inflation, money supply growth, fiscal deficits, and food price pressures. Although headline inflation was trending downward at the time, core inflation remained elevated, driven by energy costs and other structural factors.
The MPC also noted progress in the FG’s efforts at addressing insecurity, as well as the reduction in backdoor deficit financing through Ways and Means. There was also optimism surrounding the improvement of broader global and domestic macroeconomic indicators, as well as the possible role the Dangote Refinery could play in moderating transportation costs thereby curbing inflation.
However, currently, 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 (M3, the broadest measure of money supply, increased by 1.6% month-on-month (m/m) to N109.0 trillion in September). Hence, there will be key factors on the lookout by the members which will be central to the decision the MPC takes.
Economic activity
Based on the CBN’s Purchasing Managers Index (PMI) survey report, the Composite PMI surpassed the 50.0 points threshold in Q3 2024, averaging 50.13 points in Q3 2024 from an average of 48.0 points in Q2-24, indicating still resilient economic activities in the non-oil sector amid persistent headwinds.
Specifically, economic activities expanded in August (50.2 points vs. July: 49.7 points) for the first time since June 2023 and remained in the expansion territory in September (50.5 points). Activities improved in the services (50.7 points vs Q2-24: 48.1 points) and agricultural (50.5 points vs Q2-24: 49.4 points) sectors, while the industry sector (49.1 points vs Q2-24: 47.17 points) remained in the contractionary territory, reflecting the combined impact of subdued consumer demand, tight financial conditions, and sustained inflationary pressures.
Amid all these, there has been significant improvement in domestic oil production (1.55mb/d vs Q2 2024: 1.47mb/d | Q3 2023: 1.43 mb/d) driven by improved security measures and growth in oil produced from the new oil stream.
Hence, it is expected that the committee to acknowledge the still positive growth in the oil and non-oil sectors amid several bottlenecks while retaining their optimistic outlook on GDP growth (2024 FY: 3.32%).
Inflation
The significant impact of the hike in PMS prices, widespread flooding, and naira depreciation continues to exert upward pressure on consumer prices. Precisely, inflation rose for the second consecutive month in October, climbing by 118 basis points (bps) to 33.88% y/y (September: +55bps to 32.70% y/y), reversing the moderation seen in July (-80bps to 33.40% y/y) and August (-125bps to 32.15% y/y).
Notably, food inflation defied the typical relief from the harvest season, driven by sub-optimal harvest yields and elevated transportation costs, rising by 139bps to 39.16% y/y (September: 37.77% y/y). Similarly, core inflation increased to 28.37% y/y (September: -15bps to 27.43% y/y), following a dip in the previous month, reflecting the effect of higher transportation costs and continued naira depreciation. On a month-on-month basis, headline inflation edged higher by 12bps to 2.64% (September: 2.52% m/m).
Hence, the MPC will look to 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.
Renewed FPI interest
There is no denying that there has been significant improvement in FX market liquidity, which has been driven by the increased inflows from foreign investors following their renewed interest in the domestic capital market due to attractive naira yields and a fairly valued naira.
Specifically, total inflows into the Nigerian Autonomous Foreign Exchange Market (NAFEM) rose to a five-month high in October, climbing by 40.2% m/m to $3.04 billion (September: $2.17 billion). Foreign inflows surged significantly by 292.7% m/m to $1.36 billion, with FPIs contributing 86.0% to total inflows from the segment.
However, local inflows declined by 7.5% m/m to $1.69 billion due to reduced contributions from the CBN (-14.32% m/m), individuals (-30.57% m/m), and non-bank corporates (-8.6% m/m). Additionally, inflows to the NAFEM as of 15 November reached $2.28 billion from November 1, with FPI inflows ($991.80 million) remaining robust. Elsewhere, the FX reserves reached a significant milestone, crossing the $40.00 billion threshold for the first time in 35 months and rising by 22.0% year-to-date (YTD) to $40.28 billion as of November 20, 2024.
Meanwhile, the naira remained under pressure despite the improvement in market liquidity, as the overall supply remained insufficient to keep the naira stable. The NAFEM rate depreciated by 2.4% m/m to an average of N1,631.71/$1, compared to N1,592.89/$1 in September. So far in November, the naira has traded within a broader range of N1,685.00/$1 to N1,707.50/$1, reflecting ongoing pressures.
But analysts noted that with the CBN’s cautious interventions, despite the gains in reserves, underscore both a weak net FX reserve position and a deliberate effort to let the naira align with its fair value.
Thus, the MPC will note the sustained pressure in the FX market amid the efforts of the CBN to stabilize the naira, attributing it to seasonal factors. Furthermore, the MPC is likely to emphasize the goal of maintaining a market-reflective exchange rate.
Global Central Banks’ rate cuts
Global central banks have continued to ease policy rates, even as inflation remains near their short-term projections. Notably, central banks now perceive risks as roughly balanced, a shift from earlier concerns about upside risks despite inflation slightly exceeding the set targets.
In the United States, the Federal Reserve, for the second consecutive time, reduced the target range for the federal funds rate, albeit at a slower pace. On 7 November, the Committee lowered the rate by 25bps to 4.50% – 4.75% (previously 4.75% – 5.00%), following the 50bps cut in September.
The Committee acknowledged robust GDP growth alongside a softening labour market while highlighting progress in steering inflation toward the 2.0% target. Looking ahead, despite October’s inflation uptick to 2.6% (20bps higher), we anticipate further policy rate easing as recent data aligns with market expectations.
In the Eurozone, subdued growth and inflation below target (1.7% y/y in September) prompted the European Central Bank (ECB) to cut key policy rates for the third time this year.
In October, the ECB reduced the deposit facility, main refinancing operation, and marginal lending facility rates by 25bps each to 3.25%, 3.40%, and 3.65%, respectively.
The Committee expressed optimism about the ongoing disinflationary process, deeming it “well on track.”
In contrast, the Bank of England (BoE) has taken a more cautious approach to monetary easing due to persistent core and services inflation pressures and an expansionary UK budget. The BoE’s Monetary Policy Committee voted 8–1 to lower the key interest rate by 25bps to 4.75% (previously 5.00%), marking the second cut of the year and a cumulative reduction of 50bps.
Consistent with the Committee’s “gradual approach” guidance and the recent uptick in inflation, there is an anticipation that the BoE will hold rates steady at the December policy meeting. Consequently, the MPC will acknowledge the global trend of monetary easing while maintaining an optimistic outlook for further rate cuts, which would help mitigate capital flight risk.
However, the Committee is likely to underscore the sustained geopolitical uncertainties stemming from the Russia-Ukraine conflict and ongoing tensions in the Middle East.
Analysts’ predictions
Analysts have stated that the MPC will need to balance its efforts to combat inflation and stabilize the naira against the risk of dampening economic recovery and exacerbating fiscal pressures.
Hence, analysts at Afrinvest, noted that 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. They said, “Against this backdrop, we expect at least a 25bps increase to the MPR at the final policy meeting for the year today”.
Echoing the same sentiment, Cordros Research on its part, explained that the committee’s
communications from previous meetings have underscored their unwavering commitment to price stability.
According to the research based firm, this mandate however faces significant headwinds from persistent structural constraints in the supply chain and the recent upward adjustment in PMS prices.
The firm said, “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 50bps increase in the MPR to 27.75%, with the other policy parameters maintained”.
