Expectations from First MPC in 2023

Ahead of the Monetary Policy Committee meeting scheduled to hold next week, Nume Ekeghe writes on the considerations that the committee will have to look at before reaching a decision. 

The Monetary Policy Committee (MPC) is expected to meet next week, its first meeting for the year. And with inflation easing for the first time in over 12 months, there is likelihood that the committee would consider maintaining a status quo at the statutory meeting. 

The governor of the Central Bank of Nigeria (CBN) who chairs the committee had arrived the country ahead of the meeting after being on leave since December last year. At the two-day meeting, one of the main considerations would be the inflation rate. 

The MPC had raised benchmark interest rate to record high of 16.5 per cent last year in an effort to curb the fast-running inflation rate in the country. Inflation in Nigeria, like its peers across the world had spiked rising to 21.47 as at November last year. 

This had spurred the MPC to adopt a very hawkish stance with a promise of further increasing benchmark interest rate if the rising tide of inflation does not abate. 

However, the latest inflation figures released by the National Bureau of Statistics (NBS) on Monday showed that inflation for the first time in over 12 months abated, declining unexpectedly by 0.13 per cent month on month to 21.34 per cent in December 2022 from 21.47 per cent in November 2022.  

According to analysts at Financial Derivatives Company (FDC), inflation is expected to ease further in January, although it is projected to average 16.3 per cent in 2023. 

Whilst noting that they expect the MPC to become less hawkish at its meeting holding next week, the analysts said, “As long as the CBN remains committed to tackling inflation, the high interest rate environment will persist in 2023.”

FDC analysts had prior to the release of the December inflation figure noted that the MPC at its January meeting “could likely increase the MPR by a 50 basis points as inflation remains elevated. Whilst this could be a less aggressive move, it is likely to push up short-term rates in the near term. 

“The CBN’s hawkish stance is expected to tighten liquidity in the system and keep the general interest rate elevated. This will lead to a high cost of borrowing and limited access to finance for individuals, corporations and the government. It also raises the risk of default on loans for financial institutions which can push up impairment costs,” the analysts said.

For analysts at Cowry Assets Limited, “the policy committee may be tempted to pedal softly on its tightening stance by a token hike of 25 basis points. We believe that a moderate reversal in the headline numbers will skew the voting pattern of the committee members in favour of maintaining a tightening stance. Regardless, the lag-effect from the policy tightening may take longer in reality as Nigeria has a weak policy transmission system.” 

To the Chief Executive Officer, Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, there is need for the apex bank to ease up on its tightening stance as he said there is need to cut some slack on some of its liquidity mopping measures. 

“The current Cash Reserve Ratio (CRR) of 32.5 per cent and Monetary Policy Rate [MPR] of 16.5 per cent imposed on the Nigerian banks are among the highest globally. High CRR in particular has become a key impediment to financial intermediation by the banks.  

“Even more disturbing is the fact that effective CRR is as high as 50 per cent or more for some banks. Financial intermediation is a fundamental function and essence of the banking system in an economy. The high CRR has made it difficult for the banks to play their primary role of financial intermediation.   

“Their profitability is also adversely impacted because of limited room for credit creation activities.  Ways and Means finances of the apex bank pose greater liquidity and inflation risk to the economy than bank deposits. We seek a reduction in CRR so that the banks can be better placed to play their primary role of financial intermediation in the economy.” he stated. 

Meanwhile, analysts at Cordros Capital say they do not see the current CBN management devaluing the currency, barring a new market-oriented fiscal administration. However, for credible policy framework and reform, we lean towards devaluing the currency at the official FX markets and improving flexibility and communication in the FX framework.  

“Without flexibility, it is only a matter of time before the FX misalignments build back up, leading to more pressures to implement another outsized currency devaluation.  

“Accordingly, we believe a currency devaluation followed by periodic communications allowing the local currency to depreciate in line with fundamentals will be tenable as power changes hands in 2023.  

“On the fundamentals, the CBN can enable the currency to depreciate yearly based on the external balance assessment after considering inflation, net foreign assets, current account gap, and growth. Clear communication and commitment to this framework will be crucial to bringing back credibility and significantly reducing FX volatility, “they said.   

Muda Yusuf had noted that FX challenge had been a major predicament that investors grappled with in 2022. According to him, the dilemma investors had to cope with included sharp currency depreciation, forex market illiquidity, especially at the official window and volatility of the exchange rate, creating considerable uncertainty and unpredictability for investors as well as transparency issues in the forex allocation ecosystem.  

He noted that the official exchange rate had depreciated by 5.2 per cent in 2022, as at November, while the parallel market rate depreciated by 40 per cent.  Parallel market premium widened from 37 per cent in January to 71 per cent in November 2022. 

All eyes will be on the MPC next week to know which direction the committee will face as the leadership of the country changes baton.