MPC: Analysts weigh options for rate increase

AS the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), meets this week to decide on the direction of benchmark interest rate, finance and economic experts have provided clue on why they think the committee might consider a rate hike.

In the last meeting, the major concerns of the Committee include but were not limited to, the unabated rising trend of domestic prices and the need for monetary and fiscal policies to push down prices via financing productive ventures, which are expected to boost aggregate supply, as well as its continued innovative effort to maintain exchange rate stability, especially the incentives to attract diaspora remittances into the country.

The Committee also felt that the lifting of restrictions associated with the COVID19 pandemic and the strong recovery of aggregate demand have continued to pose a strong upside risk to inflation, as supply bottlenecks persist. It has been further aggravated by sanctions imposed on trade with Russia and other blockages associated with supplies from Ukraine.

Against this backdrop, Cowry Assets Management finance analysts noted that the final decision of the Committee from its upcoming 285th meeting would chiefly be driven by major challenges of taming the rising inflation, maintaining exchange rate stability, and sustaining growth recovery in the economy while focusing on the downside risks associated with the injection of more funds.

“We expect to see further increased inflationary pressure in the coming months due to the ongoing rainy season and the lingering effects of structural bottlenecks and insecurity.

“Other factors include probable upward adjustment to electricity tariffs, the effect of higher crude oil prices on transportation costs as well a likely increase in imported food due to upward pressures on the exchange rate. Meanwhile, we expect the Monetary Policy Committee (MPC) to at least hold Monetary Policy Rate (MPR) constant.

“Nevertheless, we do not rule out the possibility of the Committee increasing the MPR in order to further consolidate its move to stabilise the depreciating exchange rate.

Analysts from Afrinvest (West) Africa Limited believe that the sustained hike in general price level and the mounting pressure on the foreign reserves are major factors that could compel the MPC to hike policy variables.

Also, it is likely that the Central Bank is observing what is happening in South Africa, Ghana and other emerging market countries that have also increased rates.

“Given the recent commitment of global systemic Central Banks to further hike and the weak domestic fundamentals, we anticipate a 50 basis points (bps) increase in MPR to 12.0 per cent.

“However, we do not anticipate committee members to vote unanimously for a rate hike as some members may lean towards an accommodative stance given that inflation is not driven by monetary factors such as excess liquidity and credit rollout,” the firm stated in a note to clients.

It should be recalled that in the last Monetary Policy Committee communique, the CBN explained why it decided to hold on tightening in order to rein in the rising price level. MPC was of the view that given the fragile state of the current GDP growth and the potential external and domestic headwinds from the Russia-Ukraine war, a contractionary policy stance would stifle the expected investment expansion needed to drive growth and absorb the shocks in Nigeria.

MPC also felt that not only would tightening reverse the steady improvement recorded in credit expansion, it was also of the view that tightening would not necessarily tame the inflation, particularly where the marginal decline was relatively not yet sustainable.

Some analysts believe that the recent spike in the inflation rate, which currently stands at about 16.82 per cent, means more pressure for the CBN to reconsider its dovish rate stands.

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