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CBN conventional inflation tool failing
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Aggressive rate hike taking toll on production
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Monetary policy instrument overstretched
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But 25bps to 100 bps rise in MPR seen
PHILLIP ISAKPA IN LONDON, UK
HOLD! HOLD! HOLD! This is the vote and the call by two leading Nigerian analysts and one investment banking firm to members of the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) who begin their fourth meeting in 2024 to examine different domestic and international economic indicators and outlooks in order to arrive at a decision regarding Nigeria’s guiding monetary policy rate (MPR) for the next two months.
The call to hold rate is coming even though across the corporate and individual analysts landscape Business a.m. consulted and spoke with over the weekend, the consensus is that the hawkish, tightening stance of the CBN MPC will prevail when Olayemi Cardoso, the CBN governor, reads out the outcome of the deliberations tomorrow afternoon.
Afrinvest, the investment banking firm, and two finance and economic analysts, Uche Uwaleke, a professor of capital market and director, Institute of Capital Market Studies, Nasarawa State University, who also doubles as president, Capital Market Academics of Nigeria (CMAN), and Muda Yusuf, a doctor of economics, founder and chief executive officer, Centre for the Promotion of Private Enterprise (CPPE), and former director general of Lagos Chamber of Commerce and Industry (LCCI), all agreed that their expectation from today’s and tomorrow’s meetings of the MPC is that the MPR will be raised, but they said notwithstanding this expectation, they would rather the MPC took a decision to hold rate this time around.
Afrinvest analysts wrote: “We perceive that the committee would likely sustain [a] hawkish tone with further 50 bps to 100 bps hike in the MPR even though we believe a policy hold is more appropriate at this point on the balance of factors [under] consideration.”
The analysts’ “balance of factors [under] consideration” may have stemmed from their thinking that looking ahead, the 150-day relaxation of taxes on select food imports, coupled with ongoing green harvest in the South would support softer food inflation, and that, more importantly, an expectation that high base effect would amplify these positive drivers with headline to moderate to 33.12 percent in July; however noting that the “upside risks to our forecast include recent PMS pump price hike to c.₦800.00/litre due to product scarcity in some states, as well as disruptive impact of flooding on farm and logistical activities.”
Yusuf, former director general of LCCI and CEO of CPPE, said his position on the MPC staying hawkish after tomorrow’s meeting is based on his knowledge of the disposition of the CBN.
“My wish is that the central bank should put a hold on interest rate hike for now. I believe that monetary policy instruments have been practically overstretched in this quest to tame inflation. So, my wish is that we should have a pause on this hike of interest rate,” Yusuf told Business a.m.
But he then projected: “Knowing the disposition of the Central Bank of Nigeria, and giving the fact that the bank 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 is likely to hike interest rate, although it may be marginal. But that is my expectation. But my desire is different.”
A marginal rate hike for Yusuf and also for across the analysts ecosystem Business a.m. sampled for this story, with a baseline spreading from 25 basis points to 100 basis points. A hawkish CBN’s MPC has since its February meetings gone for a 750 basis points rise, maintaining it in May, when it last met.
Uche Uwaleke, the Nasarawa State University professor and president of CMAN, providing reasons for his position that the MPC should hold rate, even though he thinks they would not, said rate hikes are taking a toll on output.
“Nevertheless, if I were a member of the MPC, I would vote for a hold position as the aggressive policy rate hike is taking a toll on output. Production is stifled because of the very high cost of funds. Moreover, the seeming over reliance on the MPR as a tool to tame inflation does not appear to be making any meaningful impact due to the significant non-monetary factors driving inflation in Nigeria such as high cost of energy, transport, as well as insecurity in the food-belt regions of the country,” Uwaleke explained.
According to him, the high cost of credit is also a factor contributing to cost-push inflation, adding that this is due in part to a very high cash reserve ratio (CRR) of 45 percent representing sterilised bank deposits with the CBN.
“This liquidity squeeze is now driving undue pressure by banks on the CBN’s Standing Lending Facility,” he told Business a.m.
Uwaleke further told Business a.m. that much as tightening at this time is justified to neutralise the adverse impact of increased money supply, especially from Ways and Means, “the CBN should recognise that the challenge currently facing the Nigerian economy is not just inflation but stagflation and to this end should equally have regard to growth concerns in future meetings of the MPC,” he stressed.
The acknowledgement by all that the MPC will remain hawkish, tightening the screw by raising MPR, appears to be informed by the fact that inflation has refused to let its stranglehold on the Nigerian economy come off. For the 18th month in a row, headline inflation posted 34.19 percent in June.
Cowry Asset Management, which is among a plethora of investment houses that have projected a rate hike after the meeting tomorrow, said “we think the current inflationary pressure leaves the committee with little or no room for a rate tweak in favour of a loosening stance. Thus, a 25 bps to 50 bps hike in interest rates is anticipated.”
Analysts at Cordros Research, in projecting a hawkish outcome with a 100 basis points rate hike, linked their position to Nigeria’s inflation situation. “We expect the Committee to point out the persisting inflationary pressures, attributing it to increased food prices and the depreciation of the naira. We also expect the MPC to acknowledge the recent efforts of the government to increase food supplies and slow down food prices, including the distribution of fertilisers and the removal of import duty on specific food commodities,” they wrote in their note seen by Business a.m.
In their report on the inflationary forces shaking the Nigerian economy, Cordros Research identified the unrelenting rise in headline inflation as a major concern, with the rate jumping by 24 basis points to 34.19 percent year-on-year in June 2024.
This significant jump, the analysts explained, is due to a variety of factors, notably the ripple effect of a weakened naira on commodity prices, escalating energy prices, and the unrelenting challenge of food scarcity.
Cordros Research also stated that they expect that the MPC will acknowledge the increased naira volatility, ascribing it to rising demand whilst encouraging the CBN to increase its efforts to boost liquidity in the FX market and stabilise the naira.
They therefore made the following rate call for the MPC meeting which closes tomorrow: “We expect the MPC to maintain a tight monetary policy stance at its next meeting to reduce the negative real rate of return, manage inflation expectations, and stabilise the naira. As a result, we expect the CBN to raise the MPR by 100 basis points to 27.25 percent in its meeting next week.”
Analysts at Lead Capital, projecting their outlook for the second half of the year, had long taken a position that monetary policy would remain tight and hawkish.
They said that with inflation rate currently above 31 percent, Nigeria is in for a long haul of hawkish monetary policy decisions in the medium term, adding that “this suggests that in 2024, monetary tightening will persist until the rate of inflation softens.”
According to Lead Capital, “We expect the use of this tool to aggressively pursue the runaway inflation rate and to attract Foreign Portfolio Investors (FPI) to invest [in] FGN’s financial instruments,” but they warned that a massive inflow of FPIs, also known as “Hot Money”, is not a stable source of forex inflow as such money is short-term in nature.
Providing basis for his expectation of an interest rate hike by the MPC, Uwaleke, the director of the Institute of Capital Market Studies, Nasarawa State University, said in line with the tightening stance of the CBN, the MPC is likely to increase MPR by at least between 50 to100 basis points this July.
He said: “Recall that they had raised it by 750 basis points since February 2024, which has taken the rate up to 26.25%.
“Headline inflation rose to 34.19% year on year in June despite the aggressive hike in the MPR between February and May. To make matters worse, month on month inflation turned northwards in June. So, the MPC will still be concerned about the need to narrow the negative interest rate as well as curtail the pressure in the forex market. Only recently, the CBN was compelled to resume interventions in the forex market in defence of the international value of the domestic currency.
“Again, following the IMF-World Bank spring meetings last April, the CBN had received praise from the IMF and some global rating agencies such as Fitch for its monetary policy tightening stance. MPC will be mindful of that in order not to create a different impression, especially when the Bretton Woods institutions are urging the bank to do more,” Uwaleke explained.
Inflation remains a major headache for the CBN in its monetary policy remit. Cowry Asset Research notes this much when it states that “current inflationary pressure leaves the committee with little or no room for a rate tweak in favour of a loosening stance.”
It goes further to state that this dilemma poses a question on whether the monetary authority has no firepower within its arsenal to tame rising inflation to its target band of nine percent (9%).
“Over the years, inflationary pressures have continued to impact the economy, prompting the CBN to employ [the] conventional monetary policy tool of interest rate hike to fight rising inflation. Howbeit, this inflation targeting model has yielded little or no impact as the rate of headline inflation rises to new highs every month,” the investment banking and asset management firm stated.
Cowry analysts noted that June’s inflation rate increased by 24 basis points (bps) from 33.95 percent in May 2024 and is 11.40 percentage points higher than the 22.79 percent recorded in June 2023, and attributed the slow rate of increase to the gradual impact of tightening measures and concerted efforts by the monetary policy committee and fiscal authorities to stifle inflation, despite the removal of fuel subsidies, increases in electricity tariffs, higher PMS prices, and the pass-through effect of the weakening local currency.
The MPC has been on a steady course of interest rate hikes since the start of 2024, raising the MPR throughout 2024, from a starting point of 18.75 percent to its recent position of 26.25 percent.
