By Chinwendu Obienyi
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) is expected to make a decision on interest rates tomorrow after it kicks off its third meeting of the year today.
As in past meetings this year, the Committee remains faced with either maintaining its hiking cycle or keeping policy parameters unchanged. For context, the MPC (a replica of Federal Open Market Committee (FOMC) in the US) is the arm of the apex bank saddled with the responsibility of formulating and directing the country’s monetary policy to achieve the primary twin objective of price and exchange rate stability.
At the end of its last meeting in March, the MPC voted by 10 to 1 to raise the benchmark rate by 50 basis points (bps) to 18.0 per cent – the sixth increase in the last twelve months. This move (like previous hikes), was first, targeted at curbing the perceived liquidity-induced demand-pull inflation, and secondly, to keep up with the hawkish posture of global central banks in a bid to forestall capital flow reversal and, by extension, to mitigate the negative impact on FX illiquidity and exchange rate direction.
Economic experts have however argued that taming Nigeria’s soaring inflation rate would require efforts beyond tightening the MPR alone. For example, Daily Sun analysis of domestic inflation drivers for the past three years revealed that supply-side shocks (and not the demand side) are the main drivers of the elevated price levels. Even in January and February 2023 when the Currency In Circulation (CIC) and Currency Outside of Banks (COB) were both below 2.0 per cent of 2022 GDP due to the liquidity crunch that characterized the Naira redesign policy, headline inflation rate still nudged up by 47bps and 9bps in each of the month respectively.
Investigations revealed that the pressure on food inflation rate has remained elevated since August 2019 when the FG announced the closure of all land borders to food importation from neighbouring countries. Despite the partial reversal of the policy stance in 2021, food inflation rate has continued to surge as the slack in domestic supply capacity remains huge.
Hence, there are considerations that the Committee is expected to look at. These include; the domestic economy, inflation, FX supply and global central banks.
Domestic economy
The first quarter (Q1) of 2023 was characterized by a significant cash crunch induced by the CBN’s naira redesign drive amid increased production costs. This is reflective of the impact of the policy on the informal sector, which according to the National Bureau of Statistics (NBS), constitutes 41.4 per cent of GDP as of 2015 – World Bank estimate: 48.2 per cent (as of 2018). Consequently, the non-oil sector’s growth is likely to have slowed significantly in Q1 2023 with the agriculture, trade, real estate and arts & entertainment sub-sectors expected to have borne the brunt.
Meanwhile, crude oil production (including condensates) averaged 1.52 mb/d in Q1 2023 (Q4 2022: 1.35mb/d), suggesting that the oil sector likely grew by 2.01 per cent y/y in Q1 2023, albeit not enough to lift the overall growth prospect in the review period. Reacting to this, analysts at Cordros Research, said, they forecast that on a balance of factors and barring major shocks to the economy, the Committee will remain cautiously optimistic that domestic growth will stay on a growth path, albeit at a subdued pace.
Inflation
According to the recently released Consumer Price Index (CPI) report by NBS, consumer prices maintained their uptrend, rising by 18bps to 22.22 per cent y/y in April as against 22.04 per cent y/y recorded in March. Accordingly, the breakdown provided showed that food prices rose further by 16bps to 24.61 per cent y/y while the core inflation (+28bps to 20.14 per cent y/y) remained at its highest level since May 2004 (23.43 per cent y/y). Thus, the the Committee is likely to express further concerns on upward risks to inflationary pressures in the near term, including the prospect of subsidy removal.
FX supply
Daily Sun analysis of the drivers of exchange rate volatility over the last seven years of the current CBN management suggests that volatility is always more prominent when FX inflows from crude oil sales declined sharply, leading to CBN’s inability to inject adequate FX into the various market segments.
Further analysis of the rate volatility established that since the CBN became aggressive with capital control measures in 2020, foreign investors’ confidence has declined sharply, evidenced by the reduction in the annual capital importation size from $23.9 billion in 2019 to $5.3 billion in 2022. According to analysts at Afrinvest, the attendant effect of this FX illiquidity has been the sharp erosion of the Naira value by more than 60 per cent over the last seven years.
These headwinds remain in play despite the steps taken by the CBN to tackle the soaring inflation. Hence, it is expected that the Committee will highlight the need for the apex bank to maintain its periodic FX interventions and intensify its call to the fiscal authorities to amplify their efforts in ensuring higher crude oil production over the short-to-medium term.
Analysts’ forecast
Based on a balanced analysis on the current dynamics in the global and domestic macroeconomic landscape since the last MPC meeting in March, analysts at Afrinvest in an emailed note to Daily Sun, said they do not expect the CBN to retain or lower the anchor rate next week.
“On the contrary, we project a modest 50bps hike in MPR to 18.5 per cent, which, other things being equal, should cause a nudge in market yield and savings rate. Hence, we anticipate a mild reduction in the general household propensity to consume in line with the CBN’s expectation”, they said.
Corroborating, analysts at Cordros Research, said, the MPC is likely to maintain a slower rate hike at this meeting, adding that the Committee will look to increase the MPR by 50bps and retain other policy parameters.