Prominent economic analysts from top investment and research firms in Nigeria are predicting that the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) will implement a further hike in interest rates during its upcoming 294th meeting in Abuja. This meeting, which begins today, March 25, 2024, and concludes on March 26, is expected to address critical economic issues facing the country.
The analysts’ forecast is driven by ongoing inflationary pressures, currency exchange fluctuations, and their consequent impact on the prices of goods and services across Nigeria. These factors have raised concerns about the cost of living, prompting experts to call for swift action by the MPC to mitigate inflation’s negative effects.
Meristem Securities, in its investor report, noted that the MPC’s primary focus will likely be curbing inflation. The report suggested that the MPC may raise the Monetary Policy Rate (MPR) by 200 basis points, bringing it to 24.75%. Despite this anticipated increase, Meristem speculates that other policy measures, such as the Cash Reserve Ratio (CRR), might remain unchanged. This cautious approach would help manage system liquidity while stabilizing the naira. The CBN has been actively working to attract more Foreign Portfolio Investments (FPIs) to further support exchange rate stability.
Reflecting on the MPC’s previous actions, the February 2023 meeting saw a sharp rise in the benchmark interest rate, from 18.75% to 22.75%, marking a 400 basis point increase. The CBN also raised the CRR to 45% from 32.5%, while leaving the liquidity ratio at 30% and adjusting the asymmetric corridor around the MPR.
Other financial institutions, such as Financial Derivatives Company (FDC), have expressed expectations for a more moderate rate hike of between 100 and 150 basis points, with no significant changes anticipated to the existing policy parameters. Similarly, Afrinvest predicts an increase of 100-200 basis points, but suggests that the best course of action may be to hold rates steady in light of the recent rate hike.
Despite the CBN’s aggressive stance, inflationary pressures have remained persistent. According to data from the National Bureau of Statistics (NBS), headline inflation surged to 31.7% in February 2024, while food inflation reached 37.92%. These record high figures underscore the ongoing challenge faced by the CBN in achieving price stability.
Olayemi Cardoso, Governor of the Central Bank of Nigeria, had previously explained that the need for decisive action on inflation was crucial. In a statement in February, Cardoso noted that addressing inflation is vital to maintaining social stability and long-term economic growth, urging the MPC to take bold steps to tighten monetary policy.
Exchange rate fluctuations, particularly the naira’s performance against the US dollar, have been positively impacted by the recent interest rate hikes. The CBN’s efforts to clear foreign exchange backlogs have also played a significant role in stabilizing the FX market in the short term. Reports indicate that the CBN cleared approximately $7 billion in FX arrears, including payments to foreign airlines, helping to restore confidence in the foreign exchange market.
The naira’s exchange rate has seen notable improvement, with the currency closing at N1,431.49/$ on March 22, 2024, a positive shift from the N1,600/$ level observed during the MPC’s previous meeting. The exchange rate remains a critical factor influencing inflation, with FDC noting that the exchange rate pass-through effect is estimated at around 82%. This means that a weaker naira leads to higher import costs, which then drive up domestic prices.
Additionally, the appreciation of the naira has been linked to an improvement in Nigeria’s external reserves. As per CBN data, the country’s external reserves increased by $800 million, rising from $33.52 billion on February 23, 2024, to $34.26 billion by March 21, 2024.
