Inflation upswing could drive CBN’s MPC hawkish to tweak rates

• Analysts’ sentiments lean towards impending rates hike from Fed, major CBs, asset purchase tapering

Has December inflation upswing presented a headroom for the Central Bank of Nigeria (CBN)’s Monetary Policy Committee (MPC) to manoeuvre on rates? One of the words out there is that there is a strong possibility that a rate tightening measure could be something the wise men and women would pull out of their shared magician hat on Tuesday, January 25, 2022, at the conclusion of the first Monetary Policy Committee meeting for the new year.
For the record, the MPC has maintained the status quo 25 times in the last 28 meetings and the recent unexpected surge in inflation could be the pedal mounting pressures on the monetary policy authorities to possibly hike rates after tomorrow.
Since May 2020 when the Central Bank of Nigeria through its MPC unanimously voted to tweak policy rates downward by 100 basis points to 11.50 percent from 12.50 percent in the face of the global pandemic which rocked the global economy, dissipating its unexpected effects and induced pressures on the domestic economy, all eyes have been focused on the outcome of every MPC gathering for its outcome.
The CBN has been clever by being able to keep analysts and stakeholders in a guessing mode on what its next move would be as it continued its hold position in its last nine meetings since 2020, ostensibly to allow the recovery of output growth and the downward trend in inflation to continue smoothly.
At the last meeting of 2021 held in November, the committee gathered to decide on major economic parameters in the face of recent domestic macroeconomic developments in Nigeria and decided to retain all key policy rates such as the monetary policy rate (MPR) at 11.5 per cent, Cash Reserve Ratio (CRR) at 27.50 percent, the Liquidity Ratio (LR) at 30 percent and the asymmetric corridor of +100/-700 basis points around the MPR; while the bank continues its support and efforts aimed at revamping the economy.
A number of analysts who spoke with Business A.M., before the November meeting, had asserted that the MPC will in the face of output growth and tempering inflation, maintain the use of unorthodox tools within its arsenal as all the corners of the domestic economy lighting green gave it no room to manoeuvre rates.
One bone of contention in the matter now is the fact that major central banks across the globe are in 2022 expected to take a hawkish stance on monetary policy and rates. Thus, Nigeria’s apex bank’s stance is not likely to be too far from this thinking, especially as the latest inflation data contradicts the MPC’s expectations of a decreasing trend in inflation, which had supported its no-change position.
However, while the CBN does not formally target inflation, confining itself to a reference range of between 6 percent year on year and 9 percent for the headline measure, the trajectory of inflation is such that it would be a challenge to argue for further monetary easing.
Many analysts have avowed that while price pressures stay relatively low, chronic supply chain bottlenecks and limited access to FX through official channels remain significant; the case for the CBN to tighten its policy stance come Tuesday will be reinforced given the unexpected inflation upswing in December 2021 which printed at 15.63 per cent.
Economic analysts at the Financial Derivative Company (FDC), noted in their views contained in their January economic bulletin that, “The surge in inflation is mounting pressures on Central Banks to increase interest rates. For the first time in three years, the Bank of England raised its policy rate by 15 basis points to 0.25 percent per annum. The US also plans to hike interest rates three times in 2022. Analysts were of the view that the Nigerian MPC will maintain the status quo again next week in view of the earlier projected declining inflation. The new data now increases the probability of a tightening even though it is highly unlikely this time.”
They emphasised that the planned imminent removal of petrol subsidy by the Nigerian government, as well as the effect of the planting season, amongst other factors, will further drive growth in the inflation numbers and consequently bring about an increase in the chances of a tighter monetary policy stance.
Analysts at FBNQuest Capital Research, who share the same sentiment as analysts at Financial Derivative Company on the matter, also pointed out that the CBN Monetary Policy Committee may surprisingly adopt rates hike at the forthcoming meeting on the back of the recent upswings in the inflation trend, which points to other factors such as foreign exchange liquidity issues and supply chain bottlenecks as major drivers of the acceleration of the headline consumer price index.
“The new inflation data contradicts the MPC’s expectations of a decreasing trend in inflation, which had supported its no-change position. Based on recent data, we think the MPC may be compelled to begin raising rates sooner than the market anticipates, probably at its next meeting later this month (January 24-25). This is even though supply-side factors are the dominant drivers of the uptick in inflation.
“The tapering of asset purchases and impending rate rises by the US Federal Reserve and other major central banks, as well as the likelihood of quantitative tightening by the US Fed later this year, are all factors in favour of possible rate hikes,” they stated in their note.
Elsewhere, economic and financial market analysts at United Capital Research say the CBN may follow the steps of other major central banks and adopt hawkish policies anytime in the year in their quest to return to policy normalisation with the effect of the stance being seen in the fixed income markets, as well as in the foreign exchange segments of the financial markets.
“Major central banks in 2022 are expected to adopt hawkish policies. The return of monetary policy normalisation in advanced economies will reduce the interest spread on domestic fixed-income securities, making fixed income securities less attractive in the absence of a rate hike. Exchange rate risks and uncertainties around the upcoming election year are downside risks,” they noted.
SBM Intelligence, an Africa focused geopolitical research and strategic communications consulting firm, also suggests that “rising inflation in the US and other G20 markets due to stimulus spending will lead central banks to raise interest rates. This will make foreign investors demand more returns from emerging markets and we expect market interest rates to rise by Q2, which will have consequences on the FG’s borrowing and debt profile.”
Also, economic analysts at LoftyInc Allied Partners said, “the CBN is expected to roll out more policies to stabilise the country’s currency to attract more investment within and outside of Nigeria. Furthermore, the inflation rate is expected to remain at double-digit but below the 2021 forecast on the back of policy tightening by the CBN.”
Meanwhile, across the sub-Saharan Africa region, analysts also noted that heightened inflationary pressures could force most central banks in Africa to adopt a contractionary monetary policy, following the footsteps of central bank chiefs in advanced economies.
Just as was noted earlier, the Bank of England raised its policy rate by 15 basis points to 0.25 percent per annum in December 2021 (the first time in three years). The US Fed also plans to increase interest rates at least thrice in 2022. However, three of the SSA countries (South Africa, Ghana and Zambia) raised their benchmark interest rates in November 2021.