Inflation, FX, Others Top Agenda as MPC Reconvenes Today, Analysts Predict Hold on Policy Instruments

James Emejo in Abuja

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) will meet today to evaluate the impact of its massive rate hike in the previous meeting and to determine the direction of monetary policy in the future.

Undoubtedly, the discussion will mostly centre on the unrelenting inflationary pressures which reached a 26-year high at 31.70 per cent in February despite the central bank pursuing a contractionary policy regime.

The committee will also give attention to current exchange rate volatility which has shown a bit of moderation in recent weeks.

Analysts have predicted a hold on key policy rates, particularly the Monetary Policy Rate (MPR), the benchmark interest rate.

During its February 27, 2024 meeting, the first to be superintended by Cardoso, the apex bank jolted the markets and beat analysts’ expectations when in one fell swoop, it raised the Monetary Policy Rate (MPR) by a whopping 400- basis points to 22.75 per cent from 18.75 per cent – at a period of biting economic hardship occasioned mainly by the removal of fuel subsidy and floating of the Naira.

The bank also adjusted the asymmetric corridor around the MPR to +100/-700 basis points from +100/-300 basis points.

The central bank further raised the Cash Reserve Requirement (CRR) to 45 per cent from 32.5 per cent and retained the Liquidity Ratio at 30 per cent.
Before the meeting, most analysts had forecasted a hike of between 200 and 250 basis points to tame headline inflation which stood at 29.90 per cent in January 2024.

The MPR is the rate at which commercial banks borrow from the apex bank and often determines the cost of funds in the economy.

Though foreign exchange (FX) volatility appeared to have moderated since the last MPC meeting, inflation had remained unpacified.

However, analysts who spoke to THISDAY on their expectations for the meeting were unanimous that the committee would most likely maintain the current policy levels especially given the unprecedented interest rate hike described as an “overkill”.

They said despite the continued spike in inflation which reached a 26-year high at 31.70 per cent in February, the central bank would likely not tighten the policy tools to monitor the outcomes of the last meeting.  

President, Association of Capital Market Academics of Nigeria, Prof. Uche Uwaleke, said inflationary pressure had persisted despite moderation in the exchange rate, adding that headline inflation remained stubbornly elevated way ahead of the CBN’s target of 21.4 per cent for 2024.

He said, “Given the signals coming from the CBN governor and the inflation targeting stance of the CBN, another round of tightening via the Monetary Policy Rate should be expected in March by at least 100 basis points.

“However, my personal view is that the MPC should pause for now to see how the jumbo rate hike carried out in February transmits through the economy.”

Also, Managing Director/Chief Executive, SD&D Capital Management Limited, Mr. Idakolo Gbolade, supported a “hold on the MPR at 22.75 to see how the new MPR settles the economy before further actions”.

He said the inflationary pressures in February further demonstrated that increasing MPR alone will not stem the headline index, stressing that other major factors affecting rising prices persist.

Gbolade said, “The rate of food inflation is higher and the fluctuating value of the Naira coupled with dwindling economic activities has given rise to high cost of goods and services which will also impact inflation. The high-interest rate occasioned by an increase in MPR is also not helping the manufacturing sector to increase productivity.

“The resultant effect of rising inflation is reduced purchasing power and a struggling economy.

The government should intensify its welfare programme for the indigent poor to alleviate the increased hardship and pain.

“But in the long run, the government needs to immediately implement its agricultural policies and boost the private sector with loan schemes to rejuvenate the economy and prevent further unemployment. Increased economic activities and strengthening of the Naira will lead to a gradual reduction in inflationary trend in the long run.”

Also speaking to THISDAY, Wealth Management and Business Development Consultant, Mr. Ibrahim Shelleng, said, “I expect that the MPC will maintain the current MPR despite the uptick in inflation figures”, adding that CBN remained focused on prioritising price stability in the short term to tackle inflation.

He said, “The moderation in the FX volatility will further strengthen the CBN’s resolve that the current policy is working, and more than likely, they would maintain this stance to see further effects on the FX situation.

“I believe the CBN is focused on stabilisation of the Naira as a means to tackling inflation, and while this may hurt growth due to higher borrowing costs, the CBN is prioritising price stability in the short term to tackle inflation.”

On his part, Managing Director/Chief Executive, Dignity Finance and Investment Limited, Dr. Chijioke Ekechukwu, said the CBN should conduct an impact assessment following the recent rate hike to determine whether to tighten, hold, or loosen policy instruments and to avoid arbitrary or premeditated policy actions.

He said, “To imagine that CBN Governor in the last MPC meeting recognised the other factors affecting inflation rate other than the orchestrated money in circulation. I expect that a survey of the impact of these other factors should be carried out, to know their extent and magnitude, and determine whether it is necessary to tighten further and what extent of tightening is required.

“A survey of the impact of further tightening on other economic drivers will also be necessary. This is so that these decisions shouldn’t be taken arbitrarily or in a premeditated manner.”