As the Monetary Policy Committee (MPC) meets to set the tone for the Central Bank of Nigeria’s policy thrust for the year, after an aggressive campaign to rein in runaway inflation in 2023, analysts have predicted that the committee might raise the benchmark interest rate in its effort to continuously drive down inflation.
“Thus, we anticipate the MPC would deliver a 50bps hike in MPR to signal that it is still concerned about driving down high inflation, and at the same time, buy more time to observe price developments and the lingering effect of previous aggressive hikes.
“Nevertheless, we maintain our MPR hike ceiling for 2023 at 150 basis points (bps) as against 500 bps seen in 2022,” analysts from Afrinvest (West) Africa Limited wrote in a note to clients.
The MPC meeting will hold between January 23 and 24,, 2023.
During the last meeting, the governor of the CBN, Godwin Emefiele, hinted that as long as inflation kept its upward trend, the bank will continue to increase the MPR.
According to the analysts, the committee will consider the impact of the ongoing fuel scarcity, power outages, and the capacity for banks to create more credit due to growth in bank deposits amid the currency redesign and reinvigorated cashless policy drive.
In reaching a decision, “we suspect that the MPC would be cautious about the latest inflation print and near-term trajectory, noting that high base year masks persistent pressure.
“We also expect a wary MPC to highlight the gap between prevailing inflation level and CBN’s maximum target, continued strong growth in money supply (M3) by 21.6 percent year-on-year (y/y) in November 2022 (2022 average: 20.3 percent, 2021 average: 12.0 percent), weakness of Naira in the I&E Window (-3.5 percent to N461.50/$1.00 since November 22) and the downward sticky parallel market rate (averaging above N700.00/$1.00),” the analysts wrote.
On the flip side, the MPC will likely be concerned about the lagging effect of its consecutive hikes to a record 16.5 percent on economic activities.
Already, GDP report for Q3:2022 showed a moderation in real output growth to 2.3 percent y/y against 4.0 percent y/y and 3.5 percent in Q3:2021 and Q2:2022, respectively.
To another set of analysts from Cowry Assets Management Limited, as the MPC meets to decide on various economic variables, the policy committee may be tempted to pedal softly on its tightening stance by a token hike of 25 basis points or keep parameters constant.
“We believe that a moderate reversal in the headline numbers will skew the voting pattern of the committee members in favour of maintaining a slight tightening or hold stance.
“Regardless, the lag-effect from the policy tightening may take longer in reality as Nigeria has a weak policy transmission system.
“Given the decisions of the committee to hike policy rates at its different assemblies in 2022 on the back of related economic disruptions and uncertainties that are beclouding the monetary space in Nigeria, the MPC is likely to turn its gaze back to price stability in 2023 as multiple objectives on the CBN’s table will test monetary policy effectiveness.
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