Another rate hike seen as hawkish MPC meets

With most of the members of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) taking a hawkish stance last month, expectations are high that another rate hike will be delivered at the end of their meeting on Tuesday.

At the first meeting under Governor Olayemi Cardoso, the monetary policy rate was jacked up by 400 basis points to 22.75 percent, with a member of the MPC, Aloysius Uche Ordu, voting for as high as 450 basis points. Cardoso wanted an increase of 425 basis points.

“Given the imperative to curb inflationary pressures, which could pose social challenges and impede long-term growth prospects, I am persuaded that the MPC must adopt an assertive stance by tightening monetary policy measures, with a medium-term inflation target of 21.40 percent by the end of 2024 in mind, Cardoso said in his personal statement.

“We expect a further 150bps of tightening in this cycle, taking the end of first quarter (Q1) 2024 policy rate to a high of 24.25 percent. There are risks to our view that all 150bps of further tightening will be delivered at a single meeting, not least because of the Federal Government’s need to keep debt-service costs contained. For now, however, this is our central scenario,” said Razia Khan, managing director and chief economist, Africa and Middle East Global Research at Standard Chartered Bank.

London-based Capital Economics said the minutes of the February meeting showed hawkish arguments for aggressive interest rate hikes to moderate inflation and support the naira.

“We expect this to continue at Tuesday’s meeting, with a 200 basis points hike (to 24.75 percent),” it said on Friday.

There’s been much to give Cardoso cheer ahead of Tuesday’s meeting, according to the economic research firm.

It pointed out that the CBN announced that a $7 billion backlog of imports has finally been cleared, adding that the naira itself has reacted positively, appreciating by around 10 percent to about 1,400/$.

“Even if the naira has new found stability, there’s more work for the MPC to do. Inflation surged to 31.7 percent y/y in February. On Tuesday, we think the hawks will win out once again, even if the rate rise is moderated somewhat,” the firm said.

Analysts at Cordros Research, in a note on Friday, highlighted that the MPC’s tone from the last meeting indicated the committee’s intolerance for further price increases and its commitment to ensuring inflation is brought down towards the target level.

“Whilst the current measures implemented by the committee and CBN are beginning to yield results (reduced naira volatility and improved FPI inflows), the impact on domestic prices is yet to materialise as prices remain elevated,” they said.

The analysts stressed the need to anchor inflation expectations, further tighten monetary conditions, and support continuous foreign portfolio investment inflows will underpin the committee’s decision to maintain a tight monetary policy stance.

“Accordingly, we expect the MPC to raise its policy rate again by 200bps, pushing it up to 24.75 percent while holding other parameters constant,” they said.

A report by Standard Chartered Bank said market reaction has been largely positive, despite an unchanged floor to market rates, with the lowering of the corridor around the policy rate keeping the rate on the CBN’s Standing Deposit Facility at 15.75 percent. The spread between the parallel market and the Nigeria foreign exchange market has closed, amid heightened expectations of improved USD supply on official markets, as well as a clampdown on crypto trading platforms.

February inflation accelerated to 31.7 percent y/y, with food inflation reaching 37.92 percent. “While FX stabilisation should moderate the pace of inflation in time – once the issues impeding offshore investor participation in local currency auctions are resolved – we think that further rate hikes remain likely,” the report said.

At the February meeting, Mustapha Akinkunmi, a member of the MPC, voted for a 400 basis point increase in MPR. “I am in favour of increasing all parameters. In my view, managing inflation is paramount among macro variables. I am deeply committed to this cause. I propose increasing the MPR by 400 basis points to tame inflationary pressure.”

Another member of the MPC, Muhammad Sani Abdullahi, also voted for a 400 basis point hike in the benchmark interest rate.

“In effect, I voted to raise the MPR by 400 basis points to 22.75 per cent from 18.75 percent adjust the asymmetric corridor to +100/-400 from +100/-300 basis points around the MPR, raise the CRR to 45 per cent from 32.5 per cent; and retain the Liquidity Ratio at 30 per cent,” he said in his personal statement.

“In recognising the current inflationary trend and developments in the foreign exchange market, the extant monetary policy stance should be further tightened to address inflationary concerns, raise real interest rates towards positive trajectory and incentivise capital inflows. I am convinced that a decisive step to raise the Monetary Policy Rate (MPR) significantly will align our stance with the urgency of the situation and signal our unwavering commitment to tackling inflation,” Abdullahi said.

He highlighted that post-February 27 MPC, FX rates experienced a marginal appreciation of 0.33 percent on March 8, 2024, closing at $1,625.23/$ compared to N$1,630.66/$ on February 27, 2024.

Philip Ikeazor, member of the MPC, voted to raise the MPR by 300 basis points to 21.75 per cent from 18.75 per cent, adjust the asymmetric corridor around the MPR to +100/-700 from +100/-300 basis points, raise the Cash Reserve Ratio from 32.50 to 45.00 per cent, and retain Liquidity Ratio at 30.00 per cent.

Justifying his vote, he said, the economy is currently witnessing accelerating inflation, sluggish output growth, and a depreciated exchange rate.

“A tight monetary policy stance at this period therefore seems to be the most viable option to moderate inflation and mitigate exchange rate passthrough that has eroded households’ purchasing power in the recent past,” Ikeazor said.

Lamido Abubakar Yuguda, a member of the MPC, who also voted for a 300 basis point increase in MPR to 21.7 percent, said with the depreciation of the naira, another concern is bank asset quality.

According to him, the banking system remained resilient during the review period, with capital adequacy, liquidity and non-performing loan ratios all within normal prudential limits, adding that it was therefore very necessary that policy action be taken to slow and reverse the implied undervaluation of the Naira.

Kingsley Moghalu, former CBN’s deputy governor and chairman, advisory board and board of directors, Africa Private Sector Summit, advised the CBN to continue its recently announced monetary policy stance of tightening the money supply for the next 24 months at least until inflation is brought under firm control in the single digits.

Money supply in the country increased by 77.55 percent year-on-year to N93.96 trillion as of February 2024 from N52.92 trillion in the corresponding year, according to the data from the central bank.