Central Bank of Nigeria (CBN) may increase the benchmark interest rate for the seventh time amid concerns about rising inflation and currency depreciation.
All leading finance and investment analysts surveyed yesterday by The Nation were unanimous that the Monetary Policy Committee (MPC), which begins its two-day crucial decision-making meeting tomorrow, would maintain its hawkish stance and raise the interest rate again.
The MPC of the CBN, headed by the Governor, provides monetary policies and benchmarks, which determine the direction of the financial services sector, and the economy to a large extent.
The CBN had announced that its third MPC meeting in 2023 will hold on May 23 and 24.
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Finance and economic experts were unanimous that the MPC may increase the Monetary Policy Rate (MPR), currently at 18.0 per cent, for the seventh time.
Experts’ projections varied between an increase of 25 to 50 basis points. Most analysts favoured 50 basis points, with the MPR projected at 18.50 per cent. The apex bank is expected to retain all other ratios, with a Cash Reserve Ratio at 32.5 per cent, Liquidity Ratio at 30.0 per cent and Asymmetric Corridor of +100-700 basis points.
Nigeria’s headline inflation had risen by 18 basis points from 22.04 per cent in March 2023 to 22.22 per cent in April 2023. The naira depreciated by 0.1 per cent to N463.00 per dollar at the official Investors & Exporters Window (IEW). It trades around N740 per dollar at the parallel market, where most independent users source foreign exchange (forex).
Afrinvest West Africa said that based on a balanced analysis of the current dynamics in the global and domestic macroeconomic landscape, the CBN will not likely retain or lower the MPR but rather increase it.
“On the contrary, we project a modest 50 basis points hike in MPR to 18.5 per cent, which, other things being equal, should cause a nudge in market yield and savings rate.
“Hence, we anticipate a mild reduction in the general household propensity to consume in line with the CBN’s expectation. However, we hold that the MPR hike alone is short of being the silver bullet to tame the runaway domestic inflation rate.
“We reiterate that a combination of fiscal and monetary policy alignment, improved communication of the monetary policy to the market, and a holistic approach to structural challenges such as insecurity is the only way to tame the runaway inflation rate,” Afrinvest stated.
Cordros Capital noted that the CBN, as in the past meetings this year, remains faced with either maintaining its hiking cycle or keeping policy parameters unchanged, but it is expected to remain resolute on the path of smaller rate hikes, after taking the global and domestic events since its last policy meeting into account, more so that the CBN governor already hinted at such a path at the last policy meeting held in March.
Analysts argued that on the global scene, systemic central banks are signalling a peak in their interest rate hiking cycles although they are leaving the door open for more tightening if conditions warrant. In the domestic economy, headline inflation maintained its upward trajectory, currency pressures remain intact and there are signs the real GDP growth eased in the first quarter of 2023 primarily due to the CBN’s naira redesign drive.
“Overall, we expect the Committee to increase the MPR by 50 basis points and retain other policy parameters,” Cordros Capital stated.
Analysts said they expected the MPC to remain concerned about the persistent inflationary pressures, likely attributing it to supply shocks and the one-off elevated demand witnessed in the review month, as well as concerns over upward risks to inflationary pressures in the near term, including the prospect of subsidy removal.
Analysts noted that foreign investors remain on the sidelines given the lack of forex reforms, higher global interest rates and the absence of significant macro reforms, pointing out that CBN’s forex supply to the different forex market segments remains significantly below pre-pandemic levels. Meanwhile, the demand for the greenback remains high as market players continue to source for forex to fulfil and clear their outstanding obligations.
Financial Derivatives Company (FDC) believes the CBN will hike the MPR by 25 basis points.
Citing the trends by most other central banks, FDC argued that the “CBN will remain committed to rate hikes”.
FDC noted that the International Monetary Fund (IMF) has also urged the CBN to maintain a hawkish monetary policy stance to rein in inflation.