CBN MPC Decision: Strong Growth Headwinds Ahead, as Monetary Policy Tightness Expected to Persist
In its last meeting on May 21, 2024, the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) raised the monetary policy rate (MPR) by 150 basis points to 26.25% from 24.75%. Three rate hikes have emerged from all the past MPC meetings in 2024, supporting the rise in foreign portfolio investments (FPI) into the country, but flunked on the inflation reduction target. Since the beginning of the year, the MPC has maintained a consistent view on monetary tightening (see table 1 below).
MPC member’s decision to maintain a hawkish stance has been majorly informed by their decision to adopt an orthodox approach to mitigate inflationary pressure using the interest rate tool. However, inflation is yet to be tamed, rising by 0.24% points to 34.19% in June 2024 from 33.95 in May 2024 when the last MPC MPR decision was taken.
The Central Bank Governor has emphasized the need to stabilize exchange rates. The apex bank has implemented various measures, including selling foreign exchange (FX) to the market and employing regulatory interventions and policies. Despite these efforts, the naira exhibited relative stability throughout most of June 2024 but depreciated by 14.52% on the official market from May 27, 2024, when the MPC raised rates, to July 18, 2024.
Analysts Expectations
Dr Muda Yusuf, CEO, CPPE
“Knowing the disposition of the CBN and given that it has repeatedly affirmed its commitment to taming inflation, commitment to inflation targeting, using the tools at its disposal, there is a very high probability that the MPC will likely hike interest rate. Although it may be marginal, that is what I expect. However, I desire that the Central Bank of Nigeria (CBN) should put a hold on interest rate hikes for now”
Seyi Akinbi, Investment Analyst
“I expect MPC to hike the MPR by 100bps in response to the consistent increase in inflation. The pass-through effect of the rate hikes has been effective so far as the risk-free rate in the economy has increased significantly from a year ago. This will help to signal the intent of the CBN to douse the inflationary pressures while mandating the fiscal authorities to complement their efforts to bring about sustainable price stability”
Mr. David Adonri, Stockbroker of Highcap Securities
“The continued application of monetary policy to tackle this kind of stubborn inflation is failing because demand management is not required but supply-side fiscal policy. Should the monetary authority react by hiking interest rates again, it will further increase the yield on debt and cause financial assets to migrate more to debt.
Closing Thoughts
The CBN MPC will meet from Monday, July 22, to Tuesday, July 23, 2024, to assess broad monetary policy options and make interest rate decisions. Given the ineffectiveness of monetary policy in curbing inflation, continuous naira depreciation, higher borrowing costs, and their combined impact on the real sector, Proshare analysts expect the CBN to increase rates but would suggest a hold. The CBN might raise rates between 50 and 100 basis points
