Cash crunch, inflation seen driving MPC decision next week

The Monetary Policy Committee (MPC) will be meeting in Abuja on Monday and Tuesday for the second time in the year to decide the direction of the economy, with expectations high that it will leave the benchmark interest rate unchanged.

The MPC, which is chaired by Godwin Emefiele, governor of the CBN, meets bi-monthly and has the responsibility within the apex bank for formulating monetary and credit policy, among others.

With the Monetary Policy Rate raised by 500 basis points to 17.5 percent since May last year, analysts polled by BusinessDay expect the MPC to put the brakes on the rate-hiking cycle next week because of rising inflation and weak growth.

Nigeria’s inflation rate accelerated to 21.91 percent in February 2023 from 21.82 in January, fuelled essentially by the cost of energy, food and naira scarcity, according to the National Bureau of Statistics.

“I believe the MPC will hold the rate at the current level during the next meeting. Although the inflation rate increased in the first two months of the year 2023, which should justify a rate hike, such a decision will depress the current fragile GDP growth rate, which has also been impacted by the current cash squeeze in the country,” Ayodele Akinwunmi, an analyst at FSDH Merchant Bank, said.

Uche Uwaleke, professor of Capital Market at the Nasarawa State University Keffi, said: “I expect the MPC to maintain a hold position on rates and signal a pause to policy tightening.”

This, he said, is necessary to stimulate economic growth already hampered by the recent cash crunch.

“Headline inflation rate may have risen marginally in February when viewed year on year. But it actually dropped by 0.16 percent month-on-month and so by implication, inflation rate dropped between January and February this year. Against this backdrop, retaining policy rates stand to reason,” Uwaleke said.

Ayodeji Ebo, managing director/chief business officer at Optimus by Afrinvest, said: “I expect the CBN will sustain its hawkish stance, given the high inflation numbers albeit mild! I won’t be surprised to see a 25bps increase in MPR at this meeting.”

He said the CBN may want to give more time to assess the impact of the persistent increase at the last MPC.

“I expect discussions around how the naira scarcity will impact Q1 GDP numbers,” Ebo said.

Read also: Cash crunch: Is Nigeria shutting down?

Taiwo Oyedele, head of tax and corporate advisory services at PwC Nigeria, said the inflation report for February shows a further rise to 21.91 percent from 21.82 percent, fuelled essentially by cost of energy, food and naira scarcity as many Nigerians had to buy naira notes to spend, thereby indirectly pushing up the prices of goods.

“In view of this and the ongoing strain on households and businesses, I would expect the MPC to hold rates rather than a sustained hawkish stance,” he said.

At its last meeting in January, the MPC kept unchanged the asymmetric corridor at +100/-700 basis points around the MPR, retained the cash reserve ratio at 32.5 percent and liquidity ratio at 30 percent.