Analysts Anticipate Further Interest Rate Tightening At MPC Meeting
Analysts have anticipated further tightening of the Monetary Policy Rate (MPR) or interest rate hike by the members of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) at its meeting which will be held Monday to Tuesday this week.
The members at their maiden meeting last month raised the Monetary Policy Rate (MPR) by 400 basis points to 22.75 from 18.75 per cent, also raised the Cash Reserve Ratio from 32.5 per cent to 45.0 per cent and retained the Liquidity Ratio at 30 per cent.
A group of analysts at Afrinvest Research said it anticipated further tightening of the policy rate although other key parameters are likely to be left at current levels.
“First, we imagine that the committee would prefer a course of action that indicates an unwavering commitment to tackling inflation. We project that their assessment of risks from unchecked inflation would take precedence over the potential cost of hiking rates on real sector financing.
“Additionally, the MPC may consider that delays in rate cuts by advanced markets could heighten competition for scarce global capital in developing markets. Except for the US where inflation rose to 3.2 per cent in February, data indicate that major economies continue to make progress in steering inflation lower. In summary, we anticipate a between 100-200 bps rate hike next week.
“That said, we recommend a hold decision as a more appropriate path considering the strong interest rate hike less than a month ago. Notably, inflation is driven by monetary and structural factors. While February’s hawkish move gradually curbs worrisome money supply growth (assuming CBN maintains a strong stance against unconstrained fiscal interventions and undue real sector interventions), the fiscal authorities must rise to the occasion. This two-pronged approach is necessary to prevent excessive and ineffective utilization of monetary policy for non-monetary inflation drivers.”
They expressed that given that the hike was implemented in late February 2024, its impact was not noticeable in the latest Consumer Price Index (CPI) update which was published in March for price changes in the preceding month.
“Specifically, the report indicated that the inflation rate advanced for the fourteenth consecutive month by 180 basis points y/y to 31.7 per cent in February 2024 – a new record high in over three decades based on NBS data.
“Meanwhile, data on the exchange rate showed improvement as the Naira appreciated by 8.9 per cent and 4.7 per cent respectively to N1,453.28/$ (NAFEM) and N1,495.00/$ (Parallel market) since the last MPC meeting.
“Beyond the signalling effect of the hike, the Naira has been supported by improved FX inflows through a series of OMO auctions, positive rub-off effects of the recent transfer of NNPCL’s account to the CBN (amid favourable oil price), and intensified regulations targeted at curbing speculations,” analysts at Afrinvest Research stated.
According to them the anticipated effect of the previous MPR hike on inflation is yet to materialise due to impact lag.
“For instance, CBN staff project headline inflation to remain on the uptrend to 32.6 per cent y/y in March (Afrinvest projection: 32.2per cent) pressured by high energy prices, exchange rate passthrough effect, and food supply disruption due to the ongoing Ramadan and lingering insecurity.”
They, however, suggested urgent and sizable fiscal-sided policy moves to address insecurity around farming regions, review ineffective logistics networks and poor infrastructure for food supply, as well as improve support for the Agric sector in the form of access to quality and affordable inputs and tools.
“Additionally, efforts should be made to address the worsening power supply, which poses challenges for both businesses and households, especially with the increasing expenses associated with generating power independently. Overall, policies to enhance productivity sustainably must be at the forefront of fiscal efforts to improve supply constraints in the economy and tackle the structural components of domestic inflation.
“Similar to the previous episode where yields on benchmark NT-bills and FGN bonds repriced upwards by 241basis points and 80 basis points to 19.2per cent and 17.6per cent respectively, we expect a bearish response to the anticipated MPR hike next week, clearing the path for average yield on benchmark FGN bonds to climb above 20 per cent.
“For equities, we note that bullish sentiment continues to be reinforced by market listings and cherry-picking based on FY:2023 earnings along with positioning for dividend payment. Nonetheless, improvement in fixed-income yields should strengthen the case for rotation out of equities, more so that valuation of some tickers has largely delinked from fundamentals, and dividend yields are underwhelming.”
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