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CBN faces tough choices on interest rate, inflation, others

The Central Bank of Nigeria (CBN) faces a dilemma: to continue the increase in benchmark interest rate or to hold on and continue to monitor the economic responses to its policy initiatives.

The choice to hold interest rate unchanged or further increase in benchmark lending rate is the kernel of the raging debate that permeates the financial markets to the boardroom of the apex bank as the Monetary Policy Committee (MPC) begins its crucial two-day meeting today.

The MPC of the CBN, headed by the Governor Olayemi Cardoso, is the highest policy-making organ of the apex bank. The MPC provides monetary policies and benchmarks, which determine the direction of the financial services sector, and the economy to a large extent.

At its last meeting in March, the MPC increased the benchmark Monetary Policy Rate (MPR) by 200 basis points to 24.75 per cent, raising the lending rate further after initial increase of 400 basis points to 22.75 per cent in February. The cumulative increase of 600 basis points shown moderating influence on the spiraling inflation, the key target of the aggressive tightening by the apex bank.

Nigeria’s headline inflation recorded its slowest increase in nearly a year in April, outperforming all analysts’ expectations of higher increase and raising hopes that spiraling consumer prices might be on a gradual decline.

The latest report by the National Bureau of Statistics (NBS) showed that Consumer Price Index (CPI) rose by 0.49 percentage points to 33.69 per cent in April, as against 33.20 per cent in March. It is the slowest increase since June 2023, when it rose by 38 basis points.

Against analysts’ prediction that inflation rate would rise by more than 100 basis points to cross the 34 per cent level, NBS report showed that month-on-month inflation eased by 73 basis points to 2.29 per cent in April as against 3.02 per cent in March.

The point of success is the hotbed of debate. While most finance and economic experts opined that the apex bank might need to sustain its tightening stance with further rate hike, there is a cautionary tone from many others that the CBN might need to allow the moderating influence of the previous hikes to fully reflect on the economy.

However, in the event of a decision on rate hike, most analysts expect a reduction in the quantum of increase, with average expectation of a 100 basis points. This implies possible increase in MPR to 25.75 per cent.

Managing Director, AIICO Capital Limited, Mr. Femi Ademola, said while inflation has started to moderate month-on-month, it is still stubborn at above 30 per cent and may be as high until later in the year.

“However, the MPC may see the monetary tightening as successful in reining in the stubborn runaway inflation. Hence, they can argue in favour of more tightening. I will expect an increase in MPR by 100 basis points,” Ademola, a Chartered Financial Analyst (CFA), said.

Managing Director, Financial Derivatives Company (FDC), Mr Bismarck Rewane, said the CBN was right on track with what needs to be done to rein in inflation and thus the expectation of further rate increase due to renewed pressure on the naira and the persistent inflation.

Rewane noted that after the CBN policy implementation in February, there was a noticeable decline in the month-on- month inflation by 10 basis points in March and another 73 basis points in April.

“We expect between 50 basis points to 100 basis points increase, in line with most other central banks in the world,” FDC stated.

According to analysts at FDC, headline inflation is expected to continue its upward trend due to the renewed pressure on naira, and rising inflation which is triggered by the planting season effect. This will be one of the major considerations at the MPC meeting.

Managing Director, Arthur Steven Asset Management, Mr. Olatunde Amolegbe, said the apex bank would consider the April inflation report and the fact that the foreign exchange (forex) market has not achieved steady stability, and thus the need for further tightening.

He however noted that the decision may be tough for the apex bank with broad divisions among its members, compared with the March’s near unanimous decision.

According to him, experts might be wary about the negative impact of the continuing tightening on inflation.

“I therefore think we will see an increase in MPR at modest level, something around 100 to 150 basis points,” Amolegbe said.   

Cordros Capital Group said the MPC would consider developments in the global and domestic economy since the last policy meeting in arriving at its decisions.

According to analysts, interest rates have remained elevated at the global level amid the ongoing geopolitical tensions and while consumer prices have slowed on a month-on-month basis in Nigeria, inflation risks are skewed to the upside due to the volatility of the naira in the foreign exchange market and the anticipated review of the minimum wage.

“Despite the moderation in price increases evidenced in the decline in month-on-month inflation numbers for April, we anticipate a further tightening of the monetary policy rate. This is because a one-month data release of a slowdown in prices is not sufficient for the MPC to conclude that inflation is under control, inflation risks are skewed to the upside given that currency pressures have resurfaced, the need to manage inflation expectations given the inflationary impact of the anticipated review of the minimum wage.

“Nevertheless, we anticipate a less hawkish stance primarily due to the slowdown in the pace of inflation and Debt Management Office (DMO)’s reluctance to take interest rates significantly higher in the fixed-income market, given its impact on the federal government’s debt burden. Accordingly, we anticipate the MPC to raise the MPR by 100 basis points to 25.75 per cent while holding other parameters constant,” Cordros Capital stated.

Afrinvest West Africa Group however said the apex bank might hold the rate unchanged, despite the upside inflation risks.

“Our position is informed by the expectation that the committee will positively appraise the broad-base moderation in the month-on-month inflation prints. In addition, we aver that the committee might consider that two months is inadequate for the full effect of the 600 basis points hike between February and March to have permeated the economy. Caution might be exercised given that first quarter Gross Domestic Products (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,” Afrinvest stated.

President, Association of Capital Market Academics in Nigeria, Prof. Uche Uwaleke, said while there were expectations of an increase of at least 100 basis points, the apex bank should retain the prevailing rates to mitigate the impact of its aggressive policy tightening on Nigerians.

“If I were a member of the MPC, I will vote for a hold position as the aggressive policy rate hike is taking a toll on output. Production is stiffled 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.

“This is 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 said.

Chief Executive Officer, Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf said while the persistent inflationary pressures in the Nigerian economy remains a major cause for concern because of the implications for purchasing power and operating costs for businesses, the MPC should soften its monetary tightening stance for the time being.

According to him, businesses are yet to recover from the shocks of the recent bullish rate hikes.

He said the use of monetary instruments should be put on pause while fiscal policy tools address supply side factors in the inflation dynamics.

SCM Capital stated that it expected inflation rate to remain elevated but at a slower rate, noting that the CBN may consider further rate hike.

FDC, which expected a rate hike to consolidate the aggressive inflation-targeting stance of the apex bank, captured the dilemma facing the apex bank in pungent summary.

According to FDC, while sustained increase in inflation expectations will continue to be a significant consideration by the CBN in deciding the direction of the MPR, such approach could be a double-edge sword with potential to hurt the economy.

“As the CBN has limited tools to deliver price stability, the intention will be to keep raising rates. However, this strategy, while potentially beneficial for fixed-income investments, poses challenges for private investors seeking credit for business expansion. This crucial aspect directly impacts productivity growth, as businesses face higher borrowing costs, potentially stifling investment and innovation.

“Moreover, the looming trade-off becomes evident during inflationary periods, where the burden of servicing high-interest debt exacerbates economic shocks. It becomes paramount to weigh the consequences of persisting with elevated interest rates. To prevent the economy from overheating and mitigate the risk of raising poverty lines and shrinking productivity,” FDC stated.

Proving further background that will shape the decision at the MPC meeting, Cordros Capital said the GDP will likely maintain positive growth trajectory in first quarter 2024.

Stanbic IBTC’s Nigerian Composite Purchasing Managers’ Index (PMI) report showed that business activities improved in first quarter 2024 relative to the previous quarter amid high inflationary pressures and tight monetary conditions. The headline PMI averaged 52.17 points in first quarter 2024 compared to the average of 49.93 points in fourth quarter 2023.

Source: The Nation