Outlook: CBN to maintain tight monetary policy in 2024

The Central Bank of Nigeria (CBN) is likely to maintain a tight monetary policy stance to rein in inflation 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 the money supply and reduce inflation.

Such measures include raising interest rates, increasing Cash Reserve Requirements (CRR), and selling government bonds.

“The CBN to maintain monetary policy tightening to tame inflationary pressures,” said Bismarck Rewane, managing director/chief executive officer of Financial Derivatives Company Limited, during an outlook session organised by Parthian Partners, Africa’s premier 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 CBN commenced a series of hikes in its benchmark interest rate in May 2022 and raised the Monetary Policy Rate (MPR) from 11.5 percent to 18.75 percent in July 2023.

The major reason for the continued interest rate hike was to rein in inflation, which is currently at 27.33 percent as of October 2023, according to the National Bureau of Statistics (NBS).

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 Economists 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.

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,” the EIU said in a new report.

“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. 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,” the report said.

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

“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.

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“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 then MPR can become effective. The naira needs to settle first before the MPR can be effective,” Teriba said.

A tight monetary policy, implemented by the CBN, can have several effects on ordinary Nigerians, both positive and negative. On the potential positive effects, tightening the money supply can help control inflation, leading to more stable prices for everyday goods and services. This can improve purchasing power and household finances.

A tight monetary policy can attract foreign investment and strengthen the Nigerian Naira. This can make imports cheaper and potentially stimulate economic growth.

By controlling inflation and the money supply, a tight monetary policy can contribute to a more stable financial system. This can benefit businesses and consumers alike.

On the negative side, when the CBN increases interest rates, it becomes more expensive for individuals and businesses to borrow money. This can lead to decreased investment, slower economic growth, and potential job losses.

Read also: CBN suspends processing fees on cash deposits

Tightening monetary policy can make it difficult for individuals and businesses to access loans, which can hinder their ability to invest, grow, or meet financial obligations.

Higher interest rates can discourage investment, both within Nigeria and from abroad. This can slow down economic growth and limit job opportunities.

While a tight monetary policy can help control inflation, the initial period can sometimes see an increase in the cost of living due to adjustments in interest rates and currency exchange rates.

The overall impact of a tight monetary policy on ordinary Nigerians depends on their individual circumstances. Some, like savers and individuals with fixed incomes, may benefit from lower inflation and a stronger currency. Others, such as borrowers and businesses reliant on credit, may experience challenges due to higher interest rates and reduced access to loans.

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 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,” EIU said.