MPC seen holding interest rates on slowing inflation

The Monetary Policy Committee (MPC) Monday commenced its first two-day meeting of the year, with expectations high on maintaining a hold on the benchmark interest rate as inflation slowed.

After raising the Monetary Policy Rate (MPR) by 500 basis points to 16.5 last year, analysts polled by BusinessDay expect the MPC to maintain the status quo after the meeting.

“Given the moderation in inflation rate based on data recently released by the NBS for December 2022, I expect the MPC to hold rates at their next meeting,” Taiwo Oyedele, head of tax and corporate advisory services at PwC, said.

He said this will be necessary to prevent overheating the system with further rate hikes and slowing down Nigeria’s fragile economic growth.

Commenting, Ayodeji Ebo, managing director/CBO, Optimus by Afrinvest, said, “with the moderation seen in inflation rate in December, I expect the MPC to maintain status quo and observe the impact of past hikes.”

Also commenting, Uche Uwaleke, professor of Capital Market at the Nasarawa State University Keffi, expects a hold position for two reasons: one, he said historical evidence suggests that the MPC seldom adjusts policy rates in January due to the need to allow the markets to stabilise in the new year.

Secondly, he said inflationary pressure is beginning to reduce as seen in headline inflation numbers for month of December 2022 not only in Nigeria but also in the US.

“We forecast rate hikes of 50bps each from the Central Bank of Nigeria and the South African Reserve Bank (SARB) in the coming week, but there are risks to both views,” said, Razia Khan, managing director, chief economist, Africa and Middle East global research, Standard Chartered Bank.

She said with the approach of Nigeria’s end-January deadline for the phasing out of old higher-denomination naira notes – after which they cease to be legal tender – cash in circulation has started to fall, effecting a tightening of sorts on behalf of the CBN.

“Given the elections in February, with securitisation of the government’s overdraft at the CBN yet to be finalised, the CBN may want to hold off on rate hikes in the very near term,” she said.

MPC meets bimonthly to facilitate the attainment of price stability and to support the economic policy of the Federal Government.

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Nigeria’s annual inflation rate, which is the rate of increase in prices eased to 21.34 percent in December of 2022, down slightly from a 17-year peak of 21.47 percent in November 2022, according to the National Bureau of Statistics (NBS).

In its last meeting, the MPC of the Central Bank of Nigeria increased the MPR, also known as the benchmark interest rate, four times last year from 11.5 percent in May to 16.5 percent in November in a bid to curb inflation.

Monetary policy tightening will continue, the lending rate will remain high, and investment will be constrained according to the Nigerian Economic Summit Group (NESG).

NESG said a tight policy stance in developed economies leads to capital flight from developing and emerging markets and inflationary pressure will highlight the need for further tightening to close the interest rate differential and rein in inflation. This could heighten financial risk and increase Non-Performing Loans (NPL) in the banking system.

Monetary tightening in 2022 has signalled an upward trend in interest rates. In addition, a faster increase in credit to the government will reduce credit availability to the private sector, thereby supporting further increases in the cost of borrowing, said NESG.

A report by Afrinvest Securities Limited said the maiden meeting for 2023 sets the tone for the Central Bank’s policy thrust for the year after an aggressive campaign to rein-in runaway inflation in 2022.

From the global perspective, the report said the committee would be confronted by risk of spill overs from weakening global growth amid sustained hawkish posture by central banks and fragilities in global geo-politics and supply chain.

According to the report, the MPC will likely be concerned about the lagging effect of its consecutive hikes to a record 16.5 percent on economic activities. Already, the GDP report for the third quarter (Q3) of 2022 showed a moderation in real output growth to 2.3 percent year-on-year (Y/Y) against 4.0 percent y/y and 3.5 percent in Q3:2021 and second quarter (Q2) of 2022 respectively. In addition, the World Bank forecasts a slowdown in domestic growth to 2.9 percent against 3.1 percent estimated for 2022.

“We believe that while growth outlook is still appreciable, the MPC would be concerned about the possibility of over-tightening, impact of election uncertainties on business climate, possibilities of slow fiscal activities amid political transitions and risks emanating from global headwinds.

“Weighing all factors, we believe a dovish posture is the least probable because the underlying pressures affecting inflation are unabating. Also, a hold decision, although very likely, might seem premature given that inflation remains elevated. Thus, we anticipate the MPC would deliver a 50bps hike in MPR to signal that it is still concerned about driving down high inflation, and at the same time, buy more time to observe price developments and the lingering effect of previous aggressive hikes. Nevertheless, we maintain our MPR hike ceiling for 2023 at 150bps as against 500bps seen in 2022,” analysts at Afrinvest said.