• Saturday, May 18, 2024
businessday logo

BusinessDay

Inflation boxes CBN to tightening stance in 2024

With the country’s inflation showing no signs of abating any time soon, the Central Bank of Nigeria (CBN) is expected to maintain a tight monetary policy stance in 2024, according to analysts.

Tight monetary policy is a set of measures taken by a country’s central bank to slow down the growth of money supply and reduce inflation. Such measures include raising interest rates, increasing cash reserve requirements, and selling government bonds.

“The CBN to maintain monetary policy tightening to tame inflationary pressures,” Bismarck Rewane, managing director/chief executive officer of Financial Derivatives Company Limited, said during an outlook session organised by Parthian Partners, an inter-dealer broker.

He said the independence of the CBN is crucial for price stability. “Consequently, the CBN is likely to intensify monetary policy tightening in 2024.”

The central bank commenced a series of hikes in its benchmark interest rate in May 2022, raising it from 11.5 percent to 18.75 percent in July 2023.

Read also; Outlook: CBN to maintain tight monetary policy in 2024

The major reason for the rate hikes was to rein in inflation, which quickened to 27.33 percent in October, according to the National Bureau of Statistics.

According to Rewane, a wholesale auction system is needed to promote price discovery and transparency in the foreign exchange market.

He said central banks across the globe are likely to begin rate cuts in 2024 as inflation slows, adding that they are likely to ease capital flight in emerging markets like Nigeria, leading to possible currency appreciation.

The Economist Intelligence Unit (EIU), the research and analysis division of the Economist Group, said the CBN has no alternative but to launch a newly intensified phase of monetary tightening when the Monetary Policy Committee (MPC) next sits, which could be in early 2024.

The EIU projects the monetary policy rate to be raised by 300 basis points to 21.75 percent next year. “However, we do not expect the CBN to deliver a positive real short-term interest rate in 2024 or beyond, and there is a risk of even greater passivity than we expect. The MPC attaches a heavy weight to economic growth, and policy choices will be subject to significant political interference,” it said in a new report.

It added: “We expect that the first rate cuts will be made in 2025, when disinflation and monetary easing in advanced markets will have set in, and that the policy rate will fall to 12.5 percent by 2026 and stay there until 2028.

Read also: Oil inches up on tight supply as US averts government shutdown

“Inflation will consistently exceed the 9 percent target ceiling and real short-term interest rates will be negative, as we expect the CBN to prioritise stimulus over its price stability mandate.”

Ayo Teriba, CEO of Economic Associates, said it will be a waste of time for the MPC to meet because there’s nothing that can be done for the monetary policy rate (MPR) to be effective. “But if we have a fixed exchange rate, or restricted capital flow then we can regain monetary policy autonomy.”

He said: “The major determinant of inflation is the pass through effect of the exchange rate; when we saw that the rate of inflation slowed in October, I attributed it to when the naira exchange rate peaked to N,1300 in the parallel market. Unless the country finds a way of stabilising the exchange rate, it will dominate the monetary policy and if you raise the MPR to 100 percent, it will have no effect on inflation.

“If the naira becomes stabilised, then the MPR will become effective or if Nigeria will build up a significant reserve that will absorb capital flows and have enough reserve, the naira will be stable and then the MPR can become effective. The naira needs to settle first before the MPR can be effective.”

According to EIU, the CBN’s weak independence has long prevented a concerted effort to tackle inflation, but monetary policy has arguably become more incoherent under President Bola Tinubu, who has publicly expressed a desire for interest rates to be lower. An MPC meeting in September was cancelled to allow vetting of a new governor, Yemi Cardoso, and four new deputies.

“Inexplicably, the MPC meeting scheduled for November was also cancelled. CBN inaction sits against rising inflation, which has jumped from 24.1 percent annually in July, when the policy rate was last raised (by 25 basis points), to 27.3 percent annually in October. The tightening cycle has been ongoing since 2022, totalling 725 basis points as at November 2023, but the stance has lost credibility,” the EIU said.