Analysts gauge MPC’s next move as Nigeria’s monetary policy on knife edge

ONOME AMUGE

The Central Bank of Nigeria’s Monetary Policy Committee (MPC) will open its fifth meeting of the year today 23rd and for two days, including tomorrow 24th of September, it will weigh up many economic indicators to set a monetary policy rate for the country many analysts say has an economic future that currently hangs in the balance. 

The meeting promises to be a high-stakes event as policymakers attempt to address the country’s persistent inflationary pressures, currency instability and other economic challenges that have been a thorn in Nigeria’s economy, all while preserving economic stability.

The frequency with which the MPC assembles to examine and calibrate monetary policy, including interest rates, has served as a focal point for intense debate among economists and market players, as they weigh in on the efficacy of these measures and their potential impacts on the wider economy. 

With each convening of the MPC, the nation’s financial landscape hangs in the balance, as the committee’s decisions have the potential to reshape the economic trajectory and influence the fortunes of households, businesses, and investors alike.

The CBN Monetary Policy Committee has in recent times, embarked on a tightening approach to monetary policy by raising the Monetary Policy Rate (MPR) in an effort to address persistent inflationary pressures.

In a show of determination to curb the rampant inflation that has plagued the nation’s economy, the MPC took decisive action in its latest meeting held in May 2024, cranking up the country’s MPR by 50 basis points to 26.75 per cent, the third rate hike in a row this year.

The unrelenting drive to tame inflation saw the apex bank increasing interest rates a remarkable 11 times consecutively since May 2022, in a bid to gain the upper hand over inflation’s stubborn hike.

The MPC’s latest monetary policy salvo saw it continuing its inflation-taming crusade, as it wielded its tools of interest rates, liquidity and reserve requirements in a coordinated assault against inflation.

A 45 percent cash reserve ratio (CRR) for Deposit Money Banks and 14 percent for merchant banks, a 30 percent liquidity ratio and an expanded asymmetric corridor for the MPR from +100 to -300 basis points, widening the range to +500 to -100 basis points, were amongst the monetary orchestra conducted by the MPC, each instrument playing its part in the inflation-busting symphony.

Yemi Cardoso, the CBN governor, who doubles as the chairman of the MPC, provided an explanation of the committee’s decision to hike the MPR, citing recent economic developments as key drivers in this policy move, including the need to stabilise the foreign exchange market and tame inflation.

Cardoso underscored the MPC’s resolve to take decisive and necessary actions to ensure a stable economic environment, declaring that the committee is unflinching in its mission to safeguard the financial well-being of the Nigerian economy.

In a welcome respite for the Nigerian economy, recent data released by the National Bureau of Statistics (NBS) revealed that the country’s headline inflation rate eased to 32.15 percent in August 2024, marking a notable decline of 1.25 percentage points from July’s figure of 33.40 percent.

As the Nigerian economy waits with bated breath for the outcome of today and tomorrow’s MPC meetings, economic analysts have begun to weigh in on their predictions, with Anthony Kila, a professor of Strategy and Development at the Commonwealth Institute of Advanced and Professional Studies, positing that for most Nigerians, little will change in the wake of the meeting.

Kila, speaking from his experience and deep knowledge of the Nigerian economy, highlighted the fact that while the recent inflation decline might be an encouraging sign, the MPC’s policy decisions may not immediately translate into tangible improvements in the lives of ordinary Nigerians, given the complex dynamics of the economy.

“As the MPC prepares to meet on Monday and Tuesday, Sept. 23rd to 24th, it is safe to say that only one of three outcomes is possible. They either increase, decrease or keep interest at the same level. 

“My suggestion for them is to pause the hike in interest rates. However, none of these outcomes will matter to most in the country,” he stated in a note made available to Business a.m. 

In his analysis of global economic trends and their contrast with the Nigerian situation, Kila emphasised the marked difference in the perceived significance of MPC meetings in well-developed economies as opposed to the Nigerian setting.

He observed that in more robust economies, MPC meetings are highly anticipated and their outcomes felt across a variety of sectors, ranging from finance to retail, and real estate, as interest rates are perceived as a crucial element affecting every facet of the economy.

According to the economic analyst, Nigeria’s economic environment remains largely unresponsive to interest rate changes, with the majority of Nigerians being directly affected only by fluctuations in the foreign exchange rate, a factor that lies outside the realm of influence of the MPC.

Kila highlighted another potential weakness in the committee’s approach to inflation control being the use of inflation rates that may not accurately reflect the lived experiences of most Nigerians.

According to him, with inflation figures that may not align with the everyday realities faced by the majority of the population, the MPC’s efforts to curb inflation could be viewed as theoretical or academic exercises, or at best, interventions that only benefit a select few.

Seeking to strengthen the effectiveness of the MPC, Kila suggested that the CBN should take heed of the limitations of its current metrics and make concerted efforts to reform its index for inflation, growth, and other economic indicators, creating more accurate and representative measures.

In addition, Kila proposed that the CBN take concrete steps to enhance the role of interest rates in the lives of everyday Nigerians, by actively supporting the development of consumer finance facilities and processes, and by fostering a more balanced relationship between monetary and fiscal policy.

Meanwhile, financial analysts at Afrinvest West Africa have postulated that the CBN’s Monetary Policy Committee will likely remain steady in its approach to interest rates during its forthcoming meeting, citing the mounting concerns around rising energy costs, which they predict may serve as a catalyst for a potential uptick in inflation.

In its analysis, Afrinvest highlighted a positive convergence of trends, with inflationary pressures easing in the last two months, dovetailing with a remarkable uptick in GDP growth, suggesting a possible emergence of more favourable economic conditions.

The most recent data by the NBS indicated that GDP growth in the second quarter of the year expanded to 3.19 percent on a year-on-year basis, marking a notable increase from the previous quarter’s figure of 2.98 percent, underpinned primarily by strong performance in the services sector, which achieved a 3.79 percent year-on-year growth rate.

Although the recent economic developments offer reasons for optimism, the financial analysts at Afrinvest have warned that the MPC should remain mindful of potential headwinds that could undermine the current progress in tackling inflation, including risks emanating from the energy sector and the disruptive consequences of widespread flooding.

“Given these conditions, we believe that a rate cut at this juncture would be premature,” they noted.

In making their case for a more restrained approach to interest rate hikes, the analysts at Afrinvest pointed to the potential negative consequences of further increases on consumption and production activities, as well as government borrowing.

This cautionary stance is rooted in the recognition that the MPC must balance the competing priorities of price stability and economic growth, a task that requires careful consideration of the macroeconomic environment and the potential risks posed by various policy options.

Drawing on their projections, the analysts at Afrinvest have foreshadowed a gradual slowing of the bullish trend in the fixed income market, as investors gauge the impact of the MPC’s policy decisions and the evolving economic landscape.

This more tempered outlook, they predict, will likely lead to a more circumspect approach in the equities market, as investors seek to explore the potential risks and opportunities presented by the current economic conditions.

Analysts at Cordros Research, in their analysis of the current economic landscape and the potential policy options for the MPC, projected that interest rates will likely remain at the current level of 26.75 percent.

Their forecast is underpinned by their reading of the dovish signals emanating from the CBN’s adjustment of the asymmetric corridor, which they interpret as a move to limit the impact of monetary policy on the economy.

“Our baseline expectation is for the MPC to adopt a “HOLD” stance in the forthcoming meeting, as we expect the Committee to refer to the recent decline in headline inflation, even as inflation risks are now strongly tilted to the upside.

“Additionally, the intensification of global monetary policy easing reduces the risk of capital flight from developing markets like Nigeria, lessening the pressure for defensive rate hikes,” Cordros noted.

Cordros analysts observed that the global economy is seeing a marked shift in monetary policy as headline inflation edges closer to target levels, leading to central banks easing up. They also noted that on the domestic front, while GDP growth remains stable, inflation has shown signs of deceleration for two consecutive months. However, the analysts have flagged the potential for a near-term uptick due to the 50.5 percent increase in the base price of petrol to N855.00 per litre, which is expected to ripple through the economy and fuel inflation.

In addition to the recent hike in petrol prices, Cordros noted the CBN’s attempt to stabilise the naira in the face of persistent demand pressure.

Taking all these factors into account, Cordros analysts anticipate that the CBN is likely to adopt a more cautious approach, opting to maintain the interest rate as a means of supporting economic stability and preserving growth.