The Monetary Policy Committee (MPC) will on Monday and Tuesday hold its first meeting without Godwin Emefiele, suspended governor of the Central Bank of Nigeria (CBN), with expectations mixed on the flow of credit in the economy.
The CBN has announced that its 292nd meeting of the MPC will hold on Monday and Tuesday next week, which will be chaired by Shonubi Folashodun, acting governor of the CBN.
While analysts differed on interest rate decisions, issues like reducing Cash Reserve Ratio (CRR), concerns around rising inflation and sluggish growth top expectations.
Nigeria’s Central Bank is cut in the web of soaring commodity prices and a fragile economic growth, causing the biggest headache as it meets to determine the Monetary Policy Rate (MPR).
The CBN commenced its series of monetary policy rate (MPR) hikes in May 2022 from 11.5 percent to 18.5 percent the current rate.
President Bola Ahmed Tinubu had said interest rates need to be reduced to increase investment and consumer purchasing in ways that sustain the economy at a higher level.
With the recent removal of subsidy on fuel, the increase in energy prices and the liberalisation of the exchange rate, inflationary pressure will no doubt persist unless MPC consider options that will deal with the pressure aggressively, said analysts.
“The MPC is facing a very dicey MPC since the suspension of the governor. Economic growth is slow and fragile, and in need of liquidity to stop stronger growth,” said Yemi Kale, partner & chief economist, KPMG Nigeria.
At the same he said inflation rates are high and rising, and with the recent subsidy and FX reforms inflation is almost definitely going to rise higher and all happening at a time confidence in its ability to control inflation is weak.
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He said the inability of the CBN to control inflation has been largely due to the main drivers of inflation being structural and supply based, which can’t be controlled effectively with the money supply tools available to the CBN.
“However, more recently the growth in money supply following the various recent forms is likely to worsen inflation. Excess liquidity may also find its way into the FX market and put pressure on naira both at official and parallel.
“The MPC will therefore have a difficult decision on how to pull inflation down without hurting economic growth further, which further tightening might cause. However I expect CBN will be more concerned about inflation being its core responsibility and will tighten the MPR further but at the same time release the CRR to support the economy, Kale said.
Abiodun Keripe, managing director, Afrinvest Research & Consulting, expects the MPC committee to raise the policy rate in response to a higher price level following the PMS subsidy removal and the Naira unification.
He said the higher rate should provide succor for the capital market and help to attract foreign portfolios but not without pain for the domestic economy. However, developments in the fixed income market show that the CBN is guiding rates lower.
According to him, the CBN is still a functional entity with its independence and internal structures to ensure continuity of its operations.
“The new administration has signaled its desired level/target for key policy indicators such as interest and exchange rates. Already, the FX windows have been unified as a step to achieving the desired FX rate level. However, interest rates remain high and there is a probability for the CBN to implement further increases. This questions the scope for a single digit interest rate target,” he said.
Based on external and domestic market developments, Keripe expects the CBN to increase oversight on the market and financial system stability, saying that inflation remains sticky upwards with the June data printing close to 23 percent while the FX unification has seen the Naira record another marked weakness and GDP growth remains fragile.
“These will remain key pressure points for the MPC committee as it joggles to balance the trilemma. The alignment of fiscal and monetary policies will add another layer of concern for the CBN. We expect to see better alignment going forward.
Based on fundamentals, “I suppose it was high time for the CBN to reassess its policy response to inflation (which remains stubborn) as the effectiveness of the MPR in taming inflation has been weak. The pressure for inflation has increasingly become structural while a large segment of the economy is informal with significant disconnect from the impacts of monetary policies,” he said.
Ronke Akinyemi, head of global markets, Parthian Partners, said, “We speculate a decline in MPR rate at the next MPC meeting in line with the president’s promise of lower interest rates at his inaugural address where he described the current interest rate as “anti-people and anti-business.”
She said, also the recent reduction of CRR of merchant banks to 10 percent from 32.5 percent further supports the CBN’s tilt towards lower interest rates.
The CBN on Friday revised the CRR of Merchant banks to 10 percent from 32.5 percent, effective August 1, 2023.
For analysts at the FBNQuest, the MPC is likely to pause its rate hikes. “We expect the MPC to pause its rate hike cycle at its July 2023 meeting to assess the effectiveness of prior rate hikes. Therefore, we see the policy rate unchanged at 18.5 percent. However, monetary policy will remain tight. We expect a year-end inflation rate of about 28.2 percent.
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