CBN likely to retain rates to support economic recovery
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The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) is expected to keep interest rate unchanged as the apex bank begins a two-day policy meeting today.
Analysts believed the MPC will retain the Monetary Policy Rate (MPR)- the benchmark interest rate- at 26.25 per cent and also keep all other policy parameters reached in its July meeting unchanged.
The committee’s decision will be based on key developments in the domestic economy, including decline in inflation figures, and subtle growth in Gross Domestic Products (GDP) which needed to be sustained.
The MPC is, therefore, expected to retain the asymmetric corridor around the MPR at +500 to -100 basis points, Cash Reserve Ratio (CRR) of deposit money banks at 45 per cent and merchant banks at 14 per cent and the Liquidity Ratio at 30 per cent.
The analysts further expect the MPC to adopt a more optimistic view regarding potential capital inflows to emerging markets, as declining global interest rates are likely to mitigate risk aversion and attract foreign investments.The MPC is likely to weigh their decision against emerging risk to domestic prices from the energy sector and flood-related disruptions.
For instance, the Consumer Price Index (CPI) data from the National Bureau of Statistics (NBS) report showed that headline inflation rate slowed for the second consecutive month to 32.15 per cent year-on-year in August, against 33.40 per cent previously.
Food inflation eased 10 basis points month-on-month to 2.37 per cent (previously: 2.47 per cent), driven by softer price increases in commodities like tobacco, tea, cocoa, and coffee, alongside the impact of the green harvests on key crops. Annual food inflation eased to 37.52 per cent, from 39.53 per cent, reaching the lowest in seven months.
Analysts at Afrinvest West Africa Limited, said rate cut will be premature, and additional hikes will be unlikely.
“Therefore, we opine that a rate cut would be premature. On the flip side, additional hikes should be off-the-card due to cost to consumption and production activities, including government borrowings. On the back of these, we forecast a hold decision this week, to allow the MPC evaluate the evolution of macroeconomic dynamics and measure risks appropriately,” Afrinvest stated.
Analysts explained that following this, and given Debt Management Office’s front loading of government borrowings in first half of this year, there would be short-term bullish trend to persist in the fixed income space, albeit softer, leading to cautious rotation into the equities market.
Also, analysts from Cordros Securities, said that like in previous meetings, the Committee will consider developments in the global and domestic economy since the last policy meeting.
On the global scene, major central banks are easing monetary policies as headline inflation trends closer to target levels. Domestically, Nigeria’s GDP growth remains resilient, while headline inflation has decelerated for two consecutive months. However, near-term pressures suggest a potential uptick due to the substantial increase in the base price of PMS (+50.5 per cent to NGN855.00/litre).
“Additionally, we point out recent efforts by the CBN to stabilise the naira amid the persisting demand pressure. Consequently, we expect the CBN to adopt a cautious stance, likely opting to maintain the interest rate to support economic stability. Our baseline expectation is that the MPC will “hold” the Monetary Policy Rate (MPR) at 26.25 per cent and retain all other policy parameters,” they said.
“We expect the MPC to recognise the consecutive two-month moderation in inflation, attributing this trend to base effect and the Central Bank of Nigeria’s tight monetary stance. However, the Committee is likely to express concern over the significant increase in fuel prices and its potential to exert upward pressure on inflation in the near term,” they said.
Cordros Securities analysts said the naira has remained volatile since the last monetary policy meeting on 23 July, given the limited FX supply amidst increased FX demand. At the same time, foreign investors have remained cautious primarily due to low investor confidence.
“However, we note the improved FX inflows into the Nigerian Autonomous Foreign Exchange Market (NAFEM), underpinned by increases in both local and foreign sources as total inflows rebounded by 21.4 per cent m/m to $2.34 billion in August (July: $1.92 billion).”
“Inflows from local sources increased by 15.5 per cent m/m to $1.94 billion in August (July: $1.68 billion) driven by increased collections from Individuals (+162.5 per cent m/m), Exporters (+28.3 per cent m/m) and Non-Bank Corporates (+18.7 per cent m/m) segments despite the weaker inflow from the CBN (-53.7 per cent m/m).
“At the same time, inflows from foreign sources increased by 62.1 per cent m/m to $394.50 million (July: $243.30 million), although remained below the first half of 2024 average ($790.57 million), reflecting still weak foreign investor confidence”.
“ We expect the MPC to acknowledge the increased naira volatility, attributing it to the unabating demand pressure while encouraging the CBN to sustain its FX supply to the market to stabilise the naira,” they said.
The MPC, they said, faces a pivotal decision – either maintain current rates to allow previous hikes to fully impact the economy or continue rate increases to reinforce gains from prior adjustments owing to the elevated inflation risks exacerbated by the recent rise in petrol price.
“Additionally, the intensification of global monetary policy easing reduces the risk of capital flight from developing markets like Nigeria, lessening the pressure for defensive rate hikes. Also, we highlight the dovish signals from the CBN coming off the apex bank’s adjustment of the asymmetric corridor to +500/-100bps around the MPR.”
“Specifically, the CBN limited the Standing Deposit Facility (SDF) rate of 25.75 per cent on deposits of up to N3 billion, with a fixed rate of 19 per cent on excess deposits, thus discouraging banks’ utilisation of this window. As a result, fixed income yields have pared down over time. Given these developments, we expect the MPC to keep the policy rate at 26.75 per cent while retaining all other parameters,” they said.
A Commonwealth Institute Director and political economist, Prof. Anthony Kila, has also advised a pause in interest rate hike.
He said interest rate adjustments have a limited impact on the broader Nigerian economy.
According to him, in many advanced and well-structured economies, decisions made by the MPC significantly affect sectors such as finance, retail, and real estate.
He noted that these economies rely heavily on interest rates to influence investment, borrowing, and spending decisions, with outcomes from such meetings directly impacting people’s daily lives.
However, Kila highlighted a fundamental disconnect between the Nigerian economy and interest rates.
“Such is not the case in the Nigerian system, where a more significant part of the economy is neither captured in nor affected by interest rates. The only rate that affects most Nigerians is the foreign exchange rate,” Kila explained, emphasising that the MPC’s influence on this remains limited.
Kila also expressed reservations about the metrics used by the MPC to assess inflation and other economic indicators.
He underscored the inflation rates considered during these meetings don’t resonate with the harsh realities faced by ordinary citizens.
Said he: “The inflation rates they use for the analysis do not reflect what most people are experiencing in their everyday lives”.
He added that in its current form, the MPC’s decisions may remain confined to academic exercises or have a limited impact on the population.
To make the MPC’s decisions more impactful, Kila called on the apex bank to review its economic indices and improve consumer finance structures.
Said he: “For the MPC to matter, the CBN needs to take cognisance of these limits and work towards reviewing its index for measuring inflation, growth, and other economic indices.
“It should also work towards making interest rates central to people’s lives by deliberately enhancing consumer finance facilities and processes and allowing fiscal policies to take their rightful place in the economy”.
