By Chinwendu Obienyi

With raging inflation and foreign exchange supply-demand mismatch, which sent the naira tumbling in recent weeks, financial markets are awaiting the decisions of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) which meets today to decide either to hold, raise or tighten rates.

The Committee’s decision is critical in ensuring tranquility or turmoil in the financial space.

The MPC meeting comes amid ongoing global economic developments as internationally, interest rates remain high due to geopolitical tensions in the Middle East, particularly Iran’s retaliatory attacks on Israel last month.

Although, the situation is not all gloom and doom in the country, experts reckon.

According to the Stanbic IBTC’s Nigerian Composite Purchasing Managers’ Index (PMI) report, business activities improved in the first quarter (Q1) of 2024 relative to the previous quarter amid high inflationary pressures and tight monetary conditions.

The report stated that headline PMI averaged 52.17 points in Q1 2024 compared to the average of 49.93 points in fourth quarter (Q4) of 2023. Nevertheless, business activities showed signs of weakness as the composite PMI fell to 51.10 points in April from 54.50 points in January 2024.

Also, efforts by the apex bank to address the scarcity of cash in circulation in the country yielded fruits as currency in circulation (CIC) stood at N11.21 trillion at the end of the first quarter (Q1) of 2024.

According to the apex bank’s Money and Credit Statistics report, the currency in circulation for January stood at N3.650 trillion as compared to N1.39 trillion recorded in 2023.

The increase continued further in February which saw about N3.69 trillion recorded as against N982.1 billion. By March, the figure escalated from N1.68 trillion recorded in 2023 to N3.87 trillion in 2024.

This meant that CIC figure for Q1 2024 grew to N11.21 trillion as against N4.05 trillion recorded in the same reporting period of 2023, representing a 176.79 per cent increase. However, the report revealed that currency held outside banks surged to 94 per cent in March which meant that Nigerians were hoarding cash.

Furthermore, the country’s headline inflation climbed to 33.69 per year-on-year in April from 33.20 per cent in March. Month-on-month inflation, however, slowed to 2.29 per cent in April from 3.02% in March, aided by naira appreciation, improved food supplies, and lower logistics costs.

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On the other hand, food inflation decreased to 2.50 per cent month-on-month in April from 3.62 per cent in March, while core inflation slowed to 2.20 per cent from 2.54 per cent. Despite these trends, inflation remains a significant concern due to forex market pressures and the anticipated wage hike.

Similarly, capital outflows and increased demand have continued to pressure the FX market as recent reports revealed that FX inflows into Nigeria’s market dropped by 48.1 per cent and foreign portfolio investments (FPIs) falling by 68.9 per cent at the end of April. Despite the CBN interventions, it has been a bit limited due to the low net FX reserves, causing further naira weakness.

Hence, with these developments, it is no surprise that financial experts have expressed their concerns and are unsure of the country’s GDP growth prospects in the near term. Although the International Monetary Fund (IMF) endorsed the economic reforms implemented so far by President Bola Tinubu’s administration, the body called for caution against the FG’s proposed amendments to the CBN Act, warning that it might undermine the bank’s autonomy.

Commenting, the Chief Executive Officer, Centre for the Promotion of Public Enterprise (CPPE), Dr Muda Yusuf called on the CBN to slow down on monetary policy tightening, stating that businesses are yet to still recover from the hawkish monetary policy stance in the last two months.

Yusuf stressed that the monetary policy stance of hiking interest rates should be paused and the CBN should address supply issues of FX affecting inflation dynamics in the country.

He stated, “Meanwhile we urge the monetary policy Committee to soften its monetary tightening stance for the time being. Businesses are yet to recover from the shocks of the recent bullish rate hikes. The monetary instruments should be put on pause while fiscal policy tools address supply-side factors in the inflation dynamics.”

For their part, analysts at Cordros Research, they noted that despite the moderation in price increases evidenced in the decline in month-on-month inflation numbers for April, they anticipate a further tightening of the monetary policy rate.

According to them, this is because a one-month data release of a slowdown in prices is not sufficient for the MPC to conclude that inflation is under control, inflation risks are skewed to the upside given that currency pressures have resurfaced, the need to manage inflation expectations given the inflationary impact of the anticipated review of the minimum wage.

They said, “Nevertheless, we anticipate a less hawkish stance primarily due to the slowdown in the pace of inflation and DMO’s reluctance to take interest rates significantly higher in the fixed-income market, given its impact on the Federal Government’s debt burden. Accordingly, we anticipate the MPC to raise the MPR by 100 basis points to 25.75 per cent while holding other parameters constant”.

However, analysts at Afrinvest had a different view. They said, “Despite the uninspiring inflation outlook for May, we project that the CBN’s monetary policy committee would keep the benchmark rate unchanged at 24.75 per cent during its meeting next week.

Our position is informed by the expectation that the committee will positively appraise the broad-base moderation in the m/m inflation prints. In addition, we aver that the committee might consider that two months is inadequate for the full effect of the 600bps hike between February and March to have permeated the economy. Finally, caution might be exercised given that Q1 GDP data is yet to be published for the MPC to adequately assess the trajectory of the economic performance thus far in 2024. Hence, we expect a hold decision”.

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