Ahead of the Monetary Policy Committee (MPC) meeting, starting today, analysts have said the Central Bank of Nigeria (CBN) will keep interest rates unchanged despite growing pressure brought on by the tightening of monetary policy by global central banks.
At its last meeting in March 2022, the MPC decided by a majority vote to retain the monetary policy rate (MPR) at 11.5 percent, the asymmetric corridor of +100/-700 basis points around the MPR; the cash reserve ratio (CRR) at 27.5 percent; and the liquidity ratio at 30 percent.
All the analysts polled by BusinessDay expect the MPC to hold the benchmark interest rate following an uptick in the inflation rate, fragile growth and other weak macroeconomic indicators.
“The MPC cannot lower rates for now because inflation is on the uptick again. They also dare not increase rates because the manufacturers and other associations will be on their case for damaging their business,” Tope Fasua, CEO of Global Analytics, said.
Nigeria’s inflation rate jumped to 16.82 percent in April 2022, the highest in eight months, from 15.92 percent in March 2022, according to the National Bureau of Statistics (NBS).
The country’s Gross Domestic Product grew by 3.98 percent (year-on-year) in real terms in the fourth quarter of 2021, showing a sustained positive growth for the fifth quarter since the recession witnessed in 2020, when output contracted by 6.10 percent and 3.62 percent in Q2 and Q3 of 2020 respectively, according to the NBS.
“I expect the MPC to keep rates constant so as not to reverse the economic gains achieved in the past few months. I believe the CBN can use other instruments to raise fixed income interest rates, especially Open Market Operation (OMO) if they want,” Ayodeji Ebo, MD/chief business officer at Optimus by Afrinvest, said.
He, however, said an increase in the OMO rate might not necessarily translate to an increase in capital inflows into Nigeria, given the foreign exchange challenges in the country and the hike in global rates.
Ebo said increasing interest rate would lead to a higher cost of borrowing, which would have a negative impact on businesses.
On his part, Muda Yusuf, chief executive officer of Centre for the Promotion of Private Enterprise, said the CBN is facing a policy dilemma, given the prevailing economic conditions.
“We are faced with spiralling inflation and fragile economic growth. The unemployment level is still quite high. We cannot have a tightening policy in an economy grappling with fragile growth and high unemployment. But the temptation to tighten is quite high,” he said.
According to him, the credit conditions are already very tight, and the country’s CRR of 27.5 percent is one of the highest globally.
“Effective CRR for some banks is about 50 percent or even more. The liquidity ratio is 30 percent. MPR is 11.5 percent. These restraining thresholds are already on the high side. Financial intermediation is already being considerably impeded,” Yusuf added.
Analysts at Cordros Research said in a note that since the last MPC meeting in March, global central banks had marched on with interest rates hike to contain inflationary pressures, adding that the committee might raise the MPR to stabilise the external sector.
“Suppose the evolution of events in the international and domestic scenes since the last policy meeting is anything to go by, we envisage the ‘reactive function’ of the committee will be significantly challenged at this meeting,” they said.
According to them, the sharp increase in the country’s headline inflation in April will be a cause for concern to committee members, particularly as the trend would continue in the coming months due to the pass-through impact of elevated global energy prices.
The analysts said: “In our opinion, the hawks will likely judge that it is appropriate to take the pedal off the throttle in supporting economic recovery and switch to a hawkish monetary policy stance to anchor inflation expectations and stabilise the external sector.
Read also: April’s inflation rate hits 16.8%, highest in 8 months
“However, we think considerations about the implications of a rate hike on the domestic interest rate environment may prompt the majority of committee members to push back a rate hike until the next policy meeting in July.”
They expect the MPC to express concerns about the rising inflationary pressure, even as the Russia-Ukraine conflict and ongoing planting season introduced fresh risks amid the unfavourable base from the prior year.
“All in, we think the committee would retain the MPR at 11.5 percent alongside other monetary policy parameters. However, we do not rule out the possibility of a 50bps hike in the MPR, given the hawkish rendition among global central banks and the indirect impact of the Russia/Ukraine crisis on domestic inflationary pressures.”
According to London-based Capital Economics, Nigeria’s headline inflation rate is likely to rise further as spillovers from the war in Ukraine filter through.
It said: “The latest reading will raise the pressure on policymakers to hike interest rates to curb inflationary pressures. But the central bank looked through even higher rates of inflation in early 2021 to support the recovery.
“And with little growth momentum in the economy more recently, we think that MPC members will continue to keep rates unchanged over the coming months.”
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