The Monetary Policy Committee (MPC) will commence its fourth meeting of the year on Monday, with expectations of a further increase in the interest rate, following renewed rise in the monthly inflation rate.
Most analysts Polled by BusinessDay anticipate an increase in the Monetary Policy Rate (MPR) in the range of 50 to 100 basis points.
At the last MPC meeting in May 2024, the Central Bank of Nigeria (CBN) had signaled a rate pause when monthly inflation slowed for more than two consecutive periods.
On July 11, 2024, at the 2024 BusinessDay CEO Forum in Lagos, Olayemi Cardoso, governor of the CBN, had said the month-to-month inflation has gone down by 50 percent between February and July.
“I’m confident, in a not-too-distant future, things will begin to moderate,” he stated.
The month-on-month headline inflation and food inflation numbers rose to 2.31 percent and 2.55 percent respectively, up from 2.14 percent and 2.28 percent in the previous month. Additionally, core inflation edged up slightly by five basis points to 2.06 percent month-on-month.
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Nigeria’s inflation rate accelerated to 34.19 percent in June 2024, representing a 0.24 percent increase compared to 33.95 percent in May 2024, as reported by the National Bureau of State Statistics (NBS).
“Given the rising inflation rate, we expect a further hike in MPR by 50bps – 100bps to keep interest rate at attractable levels,” Ayodeji Ebo, managing director/CBO, Optimus by Afrinvest, said.
Charlie Robertson, head of Macro Strategy, FIM Partners UK Limited, said: “I know the CBN governor spoke of rate cuts, but given a stubborn inflation, a rate hike might be required to send the right signal to foreign and domestic investors weighing up whether to be in the naira or the US dollar.”
Razia Khan, managing director, chief economist, Africa and Middle East Global Research, Standard Chartered Bank, said pressure on the naira on both the official and parallel markets represents a clear risk to Nigeria’s policy rate.
“This is also a non-consensus view. The analyst consensus expects a 75 basis points (bps) rate hike to 27.0 percent at the July meeting. Against our expectation, June inflation quickened modestly to 34.2 percent y/y (34.0 percent in May), despite the base effect from Nigeria’s first fuel subsidy adjustment in June 2023.
“Inflation also rose by 2.3 percent m/m (2.1% in May), although we note that this still represents a slowdown from the +3.0 percent m/m prints observed in February and March,” Khan said.
She said there are good reasons for the CBN to pause its tightening, noting that the monetary policy is already restrictive, with Nigeria’s cash reserve ratio set at 45 percent.
Read also: MPC seen further raising interest rate to tame inflation
Uche Uwaleke, special adviser to the chairman of the Senate Committee on Banking, Insurance, and other Financial Institutions, said headline inflation has continued to rise and to make matters worse, month on month inflation rate resumed an upward trend in June 2024.
The naira has continued to come under pressure with the exchange rate now above N1500 to the dollar. All these will most likely provide justification for the MPC to further increase the MPR by at least 100 basis points, analysts say.
“If I were a member of the MPC, I would vote for a hold position given the fact that the harvest season will most probably moderate the inflationary pressure which is more evident in the food index,” Uwaleke noted.
For Marvellous Adiele, assistant manager, global markets, Parthian Partners, “We’ve witnessed the Monetary Policy Committee (MPC) consistently hike MPR since last year in a bid to tame the persistent inflationary pressures. On the other hand, headline and food inflation have been on the rise with the inflation figures for June 2024 published at 34.19 percent, indicating a 19th consecutive upsurge. From all indications, it’s likely that we’ll witness the MPC further hike the MPR. However, it might be with a slower momentum.”
Muda Yusuf, CEO of the Promotion of Private Enterprise, said: “Inflation is still going up. They may continue to increase interest rates but that is not what the economy needs at this time. For me, they should pause and allow the fiscal policies that have been announced to play out and let’s see the impact it will make. I think we have overstretched monetary instruments because of inflation. They should put a pause on interest rate hikes.”
But Ayodele Akinwunmi, senior relationship manager, corporate banking group, FSDH Merchant Bank, expects a lower rate.
“I expect the MPC of the central bank to maintain all policy rates at the current levels when it meets on Monday and Tuesday. Although headline inflation rate increased to 34.19 percent in June 2024, the inflation rate recorded the slowest rate of increase of 0.24 percent since June 2023. The expectation is that the inflation rate will start to drop from July 2024.”
According to him, given this outlook, the inability of rate increases to tame inflation and the adverse impacts of rate hike on economic growth shows the best policy option is to maintain rates at the current levels.
The CBN has, since Yemi Cardoso became the governor, raised the MPR by 750 basis points to 26.25 percent in May 2024 from 18.75 percent in July 2023.
