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Expectation of a Major Rate Hike as the MPC Holds its Meeting Today

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The Central Bank of Nigeria (CBN) will on Monday and Tuesday conduct the first Monetary Policy Committee (MPC) meeting under Governor Yemi Cardoso, with many analysts expecting a significant increase in the benchmark interest rate, also known as the monetary policy rate (MPR).

The MPC last met in July. Since Card0so assumed office in September 2023, the apex bank has utilised Open Market Operations to tighten its monetary policy stance as part of efforts to combat inflation.

The country’s headline inflation rate for January 2024 was 29.90 percent, up from 28.92 percent in December, according to the National Bureau of Statistics.

The central bank recently unveiled its MPC meeting calendar for this year.

Analysts and economists have been actively forecasting the potential outcome of the meeting, particularly regarding the anticipated level of interest rate adjustment.

“We expect a minimum of 300bps of tightening in the Monetary Policy Rate, and possibly as much as 550bps, taking it to 24.25 percent at end-Q1-2024 (from 18.75 percent; 23.75 percent previously),” said Razia Khan, managing director, chief economist, Africa and Middle East Global Research at Standard Chartered Bank.

She said system-wide tightening measures could be even more important, with investors likely to welcome reduced reliance on discretionary cash reserve ratio (CRR) debits.

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“Ideally, these need to be replaced by regular, predictable liquidity-draining measures, to deal with Nigeria’s structural excess liquidity overhang. Monthly Federal Accounts Allocation Committee distribution among Nigeria’s three tiers of government now shows a pronounced boost related to FX depreciation, adding to Nigeria’s excess NGN liquidity challenges,” she said in an emailed response to questions from BusinessDay.

“With January inflation accelerating to 29.9 percent year-on-year, and USD-NGN touching new parallel-market highs, we expect significant policy tightening and the announcement of de facto system-wide tightening measures. We think both steps are needed to attract greater foreign portfolio investment and anchor inflation expectations. How much policy tightening will depend on the near-term inflation target,” she added.

For Charlie Robertson, head of macro strategy at FIM Partners UK Ltd, Nigeria needs to take a leaf out of Kenya or Zambia’s book and tighten monetary policy with rate hikes.

According to him, stabilising the naira is probably the most pro-growth move the CBN can do, and so interest rate hikes would benefit the country more than harm it. He said that in Kenya, one-year interest rates are 10 percent above the most recent inflation print, while in Zambia, they are 2 percent above inflation.

“In Nigeria, they are 10 percent below inflation and this is a problem. So higher interest rates seem essential. Tough to judge how much the policy rate itself needs to rise, because of the very weak link between the policy rate and inflation,” Robertson told BusinessDay on Thursday.

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Oluwaseun Dosunmu, head of research at Parthian Securities, said the MPC is expected to increase the MPR to at least 20 percent due to the increasing rates in the fixed-income market and to checkmate the pressure in the FX market.

“However, I’m concerned about that decision because an increase in MPR would make the finance cost for businesses increase and reduce their profitability,” he said.

Ronke Akinyemi, head of global markets at Parthian Partners, said: “We expect the MPC to raise rates. Since the last MPC meeting held in July last year, we’ve seen inflation go higher. One of the ways of combating inflation is by raising interest rates. The DMO has also been raising debt at rates higher than the current MPR rate which shows that they are positioning ahead of next week’s MPC.”

Money supply, known as M2, increased by 44.32 percent in six months to N92.87 trillion as of January 2024 from N64.35 trillion in June 2023, according to the CBN.

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Money supply refers to the total amount of money circulating in an economy. It includes physical currency (like coins and banknotes) and various types of deposits in banks that can be quickly converted to cash.

Economists often categorise money supply into different measures, typically M0, M1, M2, and M3, each representing a broader definition of money with varying levels of liquidity. These measures help in understanding the overall availability of money in an economy.

In a recent report, the Nigerian Economic Summit Group (NESG) shed light on the challenges faced by the central bank in navigating inflationary pressures. It pointed out that while global central banks leaned towards dovish policies amid easing inflation, the country grappled with mounting inflationary pressures, hindering any inclination to reduce its MPR.

In 2023, the MPC raised interest rates in four consecutive meetings to 18.75 percent, while the CRR and liquidity ratio remained unchanged at 32.5 percent and 30.0 percent, respectively.

The report highlighted that the asymmetric corridor around the MPR saw an adjustment to +100/-300 basis points from +100/-700 basis points.

However, the NESG noted that inflationary pressure primarily stemmed from productivity constraints rather than monetary factors, posing challenges for traditional monetary interventions.

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