• Tuesday, December 03, 2024
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Standard Chartered expects 50bps interest rate hike as CBN decides today

Razia Khan expects CBN to raise interest rate to 27.75

Razia Khan, Managing Director, Chief Economist, Africa and Middle East, Global Research, Standard Chartered Bank

The Central Bank of Nigeria (CBN) is expected to raise its monetary policy rate (MPR) to 27.75 percent at its November 26 meeting, marking what analysts believe could be the peak of the current tightening cycle.

Razia Khan, managing director and Chief Economist for Africa and the Middle East at Standard Chartered Bank, made this forecast in a note to BusinessDay, citing persistent inflationary pressures as the primary driver of the anticipated rate hike.

“We now expect the Central Bank of Nigeria to raise the monetary policy rate by another 50 basis points to 27.75 percent. This is a shift from our earlier expectation that the CBN would hold the rate steady at 27.25 percent,” Khan said. She explained that the move is informed by the sharp rise in October inflation to 33.9 percent year-on-year, driven by surging food and transport prices.

The economist highlighted that Nigeria’s inflationary pressures stem largely from supply-side shocks rather than excessive demand. “The October inflation uptick was much faster than we had expected. In our view, it reflects the lagged effect of earlier flooding in northern Nigeria, as well as September’s sizeable fuel price increase, which was followed by a smaller rise in October,” she added.

Since the CBN began its tightening cycle in 2022, the MPR has been raised by a cumulative 1,525 basis points, with 825 basis points added since mid-2023 following President Bola Ahmed Tinubu’s fuel subsidy removal and foreign exchange reforms. However, Khan noted that while the central bank has pledged to maintain monetary tightening as long as inflation continues to rise, the upcoming rate hike is likely to be the last in the current cycle.

Read also: CBN likely to raise interest rates again – Uwaleke

“The cumulative effect of earlier tightening is still working its way through the economy,” Khan remarked. She warned that Nigeria’s financial sector might struggle to endure a higher cash reserve ratio (CRR), which currently stands at 50 percent. “A much higher CRR could pose significant challenges for the financial sector,” she emphasised.

Beyond inflation management, structural reforms and new initiatives may bolster Nigeria’s economic outlook. Khan noted that plans to rebase Nigeria’s Consumer Price Index (CPI) and Gross Domestic Product (GDP) could yield more accurate economic statistics. Additionally, she welcomed parliament’s recent approval of USD 2.21 billion in external borrowing through Eurobond and sukuk issuance, which could help strengthen Nigeria’s foreign exchange reserves.

“These measures could increase confidence in the naira’s exchange rate stability,” Khan stated, highlighting the significance of the planned implementation of the Electronic Foreign Exchange Matching System (EFEMS). “EFEMS will automate the matching of buy and sell orders in the FX market, enhancing the effectiveness of CBN interventions and improving transparency around official FX market demand.”
While inflationary pressures remain high, Khan is optimistic about the months ahead. “An inflation reprieve looks likely in the near future,” she concluded, reinforcing the belief that the central bank’s tightening measures may soon yield tangible results.

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