Analysts expect 50 basis-point rate hike on elevated inflation

…Other economists project 25 basis-point increase

The Monetary Policy Committee (MPC) has begun its final two-day meeting of the year today in Abuja, with analysts forecasting an interest rate hike of 25 to 50 basis points.

These projections align with the trajectory of the previous rate increases and are driven by persistent naira volatility and the continual rise in inflation.

Nigeria’s headline inflation rate rose to 33.88 percent in October 2024, up from 32.70 percent in September, according to the National Bureau of statistics (NBS).

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Data from the Central Bank of Nigeria (CBN) show that the inflation rate has increased from the lowest single digit of 3 percent in July 2006 to 33.88 percent in October 2024, the third highest level after it peaked at 34.19 percent in June 2024.

The CBN has maintained a policy of monetary tightening to curb inflation. Since initiating its tightening cycle in 2022, the apex bank has raised its benchmark interest rate – the Monetary Policy Rate (MPR) – by 1,525 basis points (bps). This includes 825bps implemented since mid-2023, following President Tinubu’s fuel subsidy removal and foreign exchange reforms.

“We now expect the Central Bank of Nigeria to raise the monetary policy rate by another 50 bps to 27.75 percent at its 26 November meeting. We previously expected it to hold the policy rate steady at 27.25 percent,” said Razia Khan, managing director, chief economist, Africa and Middle East Global Research, Standard Chartered Bank.

“This follows a rise in October inflation to 33.9 percent y/y, reflecting continued pressure on food and transport prices. Given meaningful monetary tightening in recent months, 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, and possibly also the lagged effect of September’s sizable fuel price increase, which was followed by a much smaller increase in October. Supply-side shocks, rather than excessive demand, continue to drive Nigeria’s inflation,” she said in a note to BusinessDay.

Ayodeji Ebo, managing director/CBO, Optimus by Afrinvest, said, “Given the unrelenting rising inflation, I expect the CBN MPC to raise the MPR by 25-50bps to keep the interest rate attractive and reduce pressure on FX. On the other hand, it will add further pressure on the companies due to the impact on financial costs.”

Charlie Robertson, head of macro strategy, FIM Partners UK Ltd, assumes no change from the CBN because confidence in the naira remains fragile.

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Tobi Ehinmosan, macroeconomic and fixed income analyst at FBNQuest Capital Research, said the committee will further raise rates since inflation remains elevated and the outlook doesn’t look promising.

According to him, inflation will continue to rise given that risks remain present.

“I think the MPC has always reiterated that their main objective is to address inflationary pressures and ensure price stability. As such, if inflation continues to trend up, the MPC may likely continue to sustain its hawkish stance to rein in inflation,” Ehinmosan noted.

Ayodele Akinwunmi, senior relationship manager, Corporate Banking Group, FSDH Merchant Bank, said the increase in sale of open market operations (OMO) means the CBN is trying to reduce liquidity to reduce inflation rate and maintain exchange rate stability.

The CBN sold a total of N7.6 trillion in OMO in the first nine months of 2024 as part of its ongoing efforts to control excess liquidity in the financial system.

This marks a significant increase compared to the N150 billion issued over the same period in 2023, according to data from the CBN. The move is a clear indication that the apex bank has been actively mopping up excess liquidity from the Nigerian financial system, analysts have observed.

OMO sales are a critical tool used by the CBN to implement its monetary policy objectives. By adjusting the volume of money circulating through these sales, the CBN can influence interest rates, which in turn affect investment, consumption, and economic growth.

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Khan further said, “While the CBN has pledged to continue to tighten monetary policy as long as inflation is still rising, we expect the November hike to be the last of this cycle. The cumulative effect of earlier tightening is likely still working its way through the economy.”