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•Say interest rate may rise by 50bps
By Chinwendu Obienyi
Ahead of the 290th Monetary Policy Committee (MPC) meeting of the Central Bank of Nigeria (CBN) holding today, financial analysts have called on its members to review the apex bank’s currency management strategy and guard against complacency about the domestic economy’s ability to bend without breaking.
The last policy meeting of the MPC in January 2023, the anchor rate – (Monetary Policy Rate (MPR) was raised for the fifth consecutive time in the last 9-months by 100 basis points (bps) to 17.5 per cent, in continuation of the CBN’s policy onslaught against Nigeria’s high inflation rate.
However, inflation rate has remained unresponsive to the CBN’s strategy (up 57bps since the last MPC to 21.9 per cent y/y), largely due to the fault lines in policy transmission mechanisms, lack of synergy between fiscal & monetary authorities, and negative spillovers from the external environment.
After the moderation witnessed in December, inflationary pressures rose for two consecutive months, settling at 21.91 per cent y/y in February (January: 21.82 per cent y/y). According to the analysts, the persistent increase in price pressures primarily reflects intermittent PMS scarcity, the associated fuel price increases, low food supply exacerbated by restricted access to fertilizer and high conflict incidences.
Also in February, food prices rose by 3bps to 24.35 per cent y/y while the core inflation moderated by 32bps to 18.84 per cent y/y. As if that was not enough, foreign investors have remained on the sidelines given the lack of FX reforms, higher global interest rates and weak macroeconomic narrative. In addition, CBN’s FX supply to the different FX market segments remains significantly below pre-pandemic levels.
Meanwhile, the demand for the dollar remains high as market players continue to source for FX to fulfil and clear their outstanding obligations. Currently, the exchange rate settled at N461.09/$1 at the official market as of 15 March 2023 as against N462.00/$1 recorded in January 24, 2023 to be specific.
In their pre-MPC thoughts, analysts at Afrinvest Research said, the MPC might further tighten the anchor rate by 50bps to 18 per cent, premising its position solely on the renewed hawkish posture of global systemic central banks, stubborn domestic inflation, and the positive but modest domestic GDP growth outlook.
“However, we canvass that the MPC should shelve its unorthodox strategy which has made its policy tools mere signaling if inflation anchoring would be achieved. For instance, leading advanced economies such as the US, UK, and the EU have continued to tighten their financial conditions despite recent easing in inflation rates. Although the anchor rate is at record-high in Nigeria, the financing condition – especially the money market rates – have remained accommodative (average T-bills rate has lost 619bps YTD), making it counterproductive to disinflation expectations. Also, we believe that the high inflation rate debacle would linger so long as the CBN continues to prioritize fiscal expansion goals, especially through large-scale intervention facilities and overbearing deficit financing, ahead of its institutional primary objective of price stability.
More so, we advise that the MPC should review its currency management strategy as the biting effect of the ongoing ill-implemented currency redesign policy would lead to a self-induced stagflation experience (high inflation and slow growth) over the medium term”, they said.
For their part, analysts at Cordros Research said, the MPC is now at a crossroads of navigating between the Scylla of pausing as risks of overtightening emerge and the Charybdis of hiking too much and watching the economy fall off a cliff.
They said, “On the global scene, systemic central banks continue to march on with their interest rate hiking cycle as labour market conditions remain resilient while inflationary pressures remain above medium-term targets, albeit softening. In the domestic economy, the sustained elevated price pressures in February will be a cause of concern to Committee members, more so that the headline inflation is expected to remain sticky in the coming months. At the same time, the downside risks to economic activities have increased, worsened by the currency redesign drive.
Thus, in our view, an optimal choice at this time is to guard against complacency about the domestic economy’s ability to bend without breaking and remain sensitive to data. Consequently, we lean towards a smaller hike, similar to the actions of central banks of developed economies. Accordingly, we expect the Committee to increase the MPR by 50bps and retain other policy parameters”.
