MPC seen further raising interest rate to tame inflation

The Monetary Policy Committee (MPC) may further raise the cost of credit to the economy (interest rate), known as the Monetary Policy Rate (MPR) by 100 basis points, to rein in rising inflation, some analysts have projected. The MPC is expected to meet on today and tomorrow.

In April 2024, the headline inflation rate rose to 33.69 percent, up from 33.20 percent in March 2024. This represents an increase of 0.49 percentage points, according to the National Bureau of Statistics (NBS).

The naira is still weak at the official and unofficial market, exchanging with the dollar at the rate of between N1,500 and N1,550.

In its last meeting in March 2024, the Central Bank of Nigeria (CBN) increased the interest rate by 200 basis points in February 2024, bringing it from 22.75 percent to 24.75 percent.

Over one month, the CBN raised its benchmark interest rate (MPR) by a total of 600 basis points to 24.75 percent in March 2024. The apex bank had also raised the interest rate in the previous month by 400 basis points to 22.75 percent.

The CBN has in a notice published on its website, informed the public that the 295th meeting of the MPC is scheduled to hold on Monday and Tuesday.

“We now expect the Central Bank of Nigeria to raise its policy rate by 100bps to 25.75 percent at its May MPC meeting (previously, on hold),” said Razia Khan, managing director, chief economist, Africa and Middle East Global Research, Standard Chartered Bank.

Speaking further in a note to BusinessDay, she said, “April CPI was in line with our expectation, rising to 33.7 percent y/y from 33.2 percent in March. More meaningfully, the m/m rate slowed to 2.3 percent from 3.0 percent in March, demonstrating – in our view – that the impact of earlier tightening is starting to be felt. This helped offset the sizable increase in electricity tariffs for the top 15 percent of users that took effect in early April.”

Khan said risks to the inflation outlook persist. She highlighted the pressure on the USD-NGN FX rate in both the Nigeria Foreign Exchange Market and the parallel market, stating, “Corporate demand is front-loaded in anticipation of another currency overshoot.

In response, the CBN stepped up its FX market intervention this week, but even more action may be needed. Until increased dollar supply is assured (we look to Afreximbank loan syndication of $1.05bn in May, World Bank financing of $750m in mid-June, and potential Eurobond issuance), the CBN will be under pressure to keep tightening.

“We now see another 100bps of tightening in May, with easing still likely from September. This takes our year-end policy rate forecast to 22.75 percent (21.75% prior),” she said.

Alatise Yusuf, chief investment officer, Cowry Asset Management, said most likely to increase further by 100 to 150 basis points, just to continue to tame inflation. In the last treasury bill auction, the rates were still maintained and this will surely continue for a while. Mopping up funds in circulation, in fact, May FGN savings bond went up as high as 17.04 and 18.04 for 2 and 3 years respectively.

Ayokunle Olubunmi, head of financial institutions ratings at Agusto Consulting, said, “Given the inflation numbers released by the NBS, we expect the MPC to maintain its tightening stance. We anticipate a further increase in the MPR, albeit not exceeding 200 basis points. However, we do not foresee a further increase in the Cash Reserve Ratio (CRR) and the liquidity ratio, at least at this meeting.”

Also, at its last MPC meeting, the CBN increased the CRR from 32.5 percent to 45 percent, adjusting the asymmetric corridor around the MPR to +100/-700 from +100/-300 basis points, and retained the liquidity ratio (LR) at 30 percent.

“The CBN will increase the MPR by 100 basis points,” said Bismarck Rewane, managing director/CEO, Financial Derivatives Company Limited. This, he said, will be a defensive strategy for the name in the forex market, adding that the naira will straddle between N1,300 and N1,400 for May.

“We anticipate that the committee will continue to tighten monetary conditions as part of its ongoing efforts to combat inflationary pressures. As such, we expect the MPC to raise the policy rate by around 50 to 100bps,” analysts at FBNQuest said.

The directors of the International Monetary Fund (IMF) have commended the Nigerian authorities’ actions to rein in inflation and restore market confidence. They stressed the importance of keeping a tight monetary policy stance to put inflation on a downward path, maintaining exchange rate flexibility, and building reserves.

According to the banking and finance sector regulator, MPC refers to a committee of Nigeria’s Central Bank established under CBN Decree 1999 (Amendment) and CBN Act of 2007 (Amended) to facilitate the attainment of price stability and to support the economic policy of the Federal Government.