Analysts have projected that the Monetary Policy Committee of the Central Bank of Nigeria, which commenced its third meeting of the year on Monday, is likely to increase the benchmark rate.
While a majority of the market watchers projected that the MPC would hike the benchmark rates to combat persistent inflation.
However, some financial pundits believed that the MPC would retain the Monetary Policy Rate, as inflation had begun to accelerate at a slower rate.
In an interview with the Financial Times last week, the Governor of CBN, Dr Olayemi Cardoso, said that the members of the Monetary Policy Committee would do whatever was necessary to tame the country’s high inflation.
Cardoso indicated that interest rates would stay high for as long as necessary to tackle inflation.
In their weekly macroeconomics report ahead of the MPC, analysts at Meristem Research projected that the MPC would hike rates in line with its avowed inflation-fighting stance.
The analysts said, “During the meeting, we expect the committee to deliberate on disinflationary trends observed in advanced economies, as well as the sustained ‘high for longer’ interest rate stance employed by monetary authorities to effectively combat inflation in these economies.
“In the domestic economy, Nigeria’s inflation rate came in lower than expected in April 2024, rising to 33.69 per cent from 33.20 per cent in the previous month (marking the 16th consecutive month of inflation uptrend). This uptick is primarily attributed to increases in both the food and core indexes, driven by higher food prices and the continued depreciation of the naira.
“However, inflation moderated on a month-on-month basis, with headline, food, and core inflation showing slower upticks of 2.29 per cent, 2.50 per cent, and 2.20 per cent, respectively, compared to 3.02 per cent, 3.62 per cent, and 2.54 per cent in March.”
Meristem analysts expected at least a one per cent hike in the monetary policy rate to 25.75 per cent while maintaining other parameters at their current levels.
They, however, raised the possibility of a hold stance due to the moderation in month-on-month inflation figures and expectations of a disinflationary trend in the coming months.
During its last meeting in March, the MPC reviewed the benchmark interest rate from 22.75 per cent to 24.75 per cent, marking the second rate hike under Governor Cardoso’s tenure since his appointment on September 26, 2023.
For Cowry Asset Management Limited analysts, the MPC is more likely to increase the MPR by 0.75 per cent to one per cent.
Their weekly report noted, “At its last two meetings in 2024, the committee maintained a hawkish stance to address inflationary pressures and adjusted other policy parameters to tighten monetary conditions in the economy. However, the slow year-on-year increase in headline indicators within the last two months and the month-on-month trend reversal suggest that previous rate hikes and policy changes by the CBN are beginning to take effect on the economy.
“In the meantime, the CBN is expected to proceed cautiously with rate hikes at the next MPC meeting, potentially increasing rates by 75 to 100 basis points as part of its ongoing efforts to tighten monetary policy and control all inflation indicators.”
Analysts at Cordros Asset Management echoed similar sentiments that the MPC may increase their benchmark rate, projecting a 0.5 per cent hike.
They pointed out that aside from global central banks approaching the end of the interest rate hiking cycle, “we think the MPC has reached a point where overtightening becomes a concern even as the debate remains on what constitutes a neutral interest rate that will not hurt domestic growth.”
“As such, we think the dilemma for the committee at the meeting will remain whether to continue its rate hike to further dampen the rising inflation trajectory or adopt a hold stance to observe emerging developments and allow for the impact of the last rate hikes to permeate the economy.
“In our view, given that the end of rate hikes by systemic global central banks is in sight amid sticky domestic inflation, we think the MPC is likely to maintain a slower rate hike at this meeting. Indeed, at the post-MPC conference in March, the CBN governor stated that maintaining aggressive tightening poses a risk to financial system stability.”
According to the analysts, the CBN governor hinted that the MPC would adopt a strategy of smaller rate hikes going forward to narrow the negative real returns amid the risks of overtightening.
“Consequently, we expect the committee to increase the MPR by 50bps and retain other policy parameters,” they stated.
However, analysts at Afrinvest Securities Limited differed, forecasting that the MPC may likely maintain a hold stance.
The Afrinvest Weekly Market Report released on Saturday said, “Despite the uninspiring inflation outlook for May, we project that the CBN’s monetary policy committee will keep the benchmark rate unchanged at 24.75 per cent during its meeting.
“Our position is informed by the expectation that the committee will positively appraise the broad-base moderation in the m/m inflation prints. In addition, we aver that the committee might consider that two months is inadequate for the full effect of the 600bps hike between February and March to have permeated the economy.
“Finally, caution might be exercised given that Q1 GDP data is yet to be published for the MPC to adequately assess the trajectory of the economic performance thus far in 2024. Hence, we expect a hold decision.”
Since the last MPC meeting, the Afrinvest analysts noted that the naira had depreciated and the spread between the parallel market rate and the official market rate further widened, thus, reversing the convergence seen earlier in the year.
In the parallel segment of the foreign exchange market, the naira appreciated by N90 on Friday, as it closed at 1,450/$1, compared to the previous day’s rate of 1,540/$1.
It was a similar trend on the Nigerian Autonomous Foreign Exchange Market window, where the naira appreciated by N36.66 to close at 1,497.33/$1 compared to 1,533.99/$1 on Thursday.
On the foreign reserves, the analysts said that there had been a steady decline of 3.17 per cent since the last MPC meeting and -1.24 per cent year-to-date.
“We expect this to be at the forefront of the MPC’s considerations. While crude oil prices (Brent as a proxy) are currently trading high at USD84.22pb, we opine that reserves will remain pressured, as the CBN continues its interventions at the foreign exchange market, amidst staggered oil production, weak US dollar inflows from oil receipts, and low FPI and FDI inflows,” they said.
Meanwhile, some economists have raised concerns about the continuous increase in the country’s inflation rate.
The Chief Economist of SPM Professionals, Paul Alaje, decried the increase in the monetary policy rate.
He said, “I do not encourage any increase in MPR because the increase would have implications.
“Already within 4 weeks, we have seen the Monetary Policy Committee increase by 600 basis points, the MPR.
“If the committee decides to further increase MPR while inflation has remained uncontrollable, in an attempt to lower inflation, it would certainly have a train of effects. Already, it is having a train of effects, you could see unemployment increasing and the economy getting slower.”
Alaje asserted that Nigeria was getting poorer and the economy was growing at a slow pace.
He advised, “The MPC committee should sit on the fence and not adjust the MPR at this time.
“We need to look at other tools rather than monetary tools in providing solutions to our economy. The monetary authorities have tried their best, and we have seen so many things they have brought, however, despite all of their efforts, the exchange rate is back at 1,500, heading towards 1,600.
“Our solution would go beyond forcing and using monetary tools when we know that it is not just the money supply influencing what we have.”
Also, an economist with Lotus Beta Analytics, Shedrach Israel, expressed concern over the MPC’s potential decision on interest rates.
Israel believed that a rate reduction was unlikely and even anticipated the possibility of an increase.
Israel’s argument centred on the current inflationary pressures in Nigeria.
“While monetary policy plays a crucial role in managing inflation, it alone cannot effectively address the current situation. Fiscal policy must be taken into account. Typically, reducing the money supply is appropriate when the economy is robust and there is an excess of money.
“However, Nigeria faces a different reality: a struggling economy, business closures, declining purchasing power, and heightened insecurity. In this context, raising interest rates could exacerbate the economic risks,” he said.
Israel recommended that the government consider temporary measures, such as reopening the border and easing import duties and taxes on imported goods.
In response to the question regarding the potential for another increase in interest rates at the upcoming MPC meeting, the National President of the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture, Dele Oye, stated that the CBN had not formally engaged the NACCIMA on those critical matters.
He noted, “Despite our numerous letters and expressed public concerns regarding the current monetary policies, we have received only one formal response. This lack of consistent dialogue hampers our ability to provide informed feedback and support to our member businesses.”
He stressed that the absence of a clear and articulated fiscal policy for 2024 presented a significant challenge.
“Without a defined fiscal framework, businesses are left in a state of uncertainty, unable to make informed one-year or medium-term strategic decisions. Instead, they are forced into a reactive stance, constantly adjusting to the government’s frequent policy announcements. This environment of unpredictability stifles growth and innovation, undermining the very objectives that monetary policy aims to achieve.
“It is difficult to predict with certainty the actions that the CBN might take at the next MPC meeting. However, it is apparent that the previous MPC policies/interest rate hikes have not successfully curbed inflation; they have also failed to stabilise the naira.
“Given the persistent inflationary pressures, another rate increase could be on the horizon. Nevertheless, such a decision should ideally be supported by a comprehensive fiscal policy that provides a clear roadmap for economic stability and growth,” he noted.
