MPC: Firm Sees 1.50% Interest Rate Hike in Feb Meeting

To reduce inflation pressure on the economy, the monetary policy committee (MPC) of the Central Bank of Nigeria (CBN) is expected to increase its benchmark interest rate by 150 basis points in the February meeting, an investment banking firm Cordros Capital Limited has predicted. 

This week, MPC will deliberate on key macroeconomic indicators with a special focus on price instability, exchange rates and liquidity conditions which the monetary authority would use measures to redirect

The CBN policy committee has not met since the removal of Godwin Emefiele, its erstwhile governor. The policy committee under Emefiele hiked the benchmark interest rate to 18.75% to reduce the country’s inflation.

Analysts said interest rate hikes failed to yield results as the fundamental cause was cost related rather than demand driven. Inflation went ballistic after ex-President Muhammadu Buhari closed borders to support rice farmers and other local industries sometime in August 2019.

In its macroeconomic note, Cordros Capital Limited said although the last MPC meeting was held in July 2023, there has been a significant increase in interest rates in the fixed-income markets towards the inflation rate, signalling the CBN’s hawkish stance against inflation.

In their observation, analysts said the apex bank in the country has issued open market operation (OMO bills) seven times in five months to mop up excess liquidity in the system.

In recent primary market auctions, the apex Bank has over-allotted markets, particularly in the Treasury bills market, pushing interest rates to record highs, the investment banking firm stated.

With these moves, the heightened level of inflationary pressures and the increased volatility in the exchange rate, analysts think that the MPC will maintain a hawkish stance, increasing the policy rate aggressively by 150 basis points, pushing the policy rate to 20.25%.

The apex bank announced that its committee is scheduled to convene on February 26th and 27th, marking its inaugural meeting for the year and the first for the current CBN governor, following two postponements in the latter half of 2023.

Analysts anticipate a decisively hawkish stance from the MPC regarding interest rates, aligning with the CBN’s commitment to achieving price stability.

“Our projection is for a significant increase in the monetary policy rate by 150bps while leaving other parameters constant.

“The anticipated increase in the policy rate would be in contrast to the prevailing global trend, where many central banks are scaling back on rate hikes and contemplating reductions. We expect the MPC’s decision to be primarily influenced by the soaring inflation, which rose to a multi-decade high of 29.90%, and the depreciation of the currency”, Cordros Capital said.

The CBN committee would note the economy’s resilience in the face of heightened inflationary pressures, elevated domestic interest rates and the paucity of foreign exchange, thus giving room for further increases in the policy rate.

The committee is also anticipated to consider the resurgence of the oil sector, given the uptick in oil production, while expecting the trend to continue as the government intensifies efforts to raise oil production.

Headline inflation rose by 98 basis points to 29.90% in January 2024, marking the highest print in at least twenty-five years. The main drivers were the depreciation of the naira exchange rate, logistics constraints induced by higher energy prices, and heightened insecurity in the food-producing middle-belt region.

Food inflation recorded the highest increase, ticking higher by 148bps to 35.41% in January. Core inflation recorded an increase of 53bps to 23.59% versus 23.06% in December 2023.

On a monthly comparison basis, inflation printed at 2.64%, 35bps faster than the last month-on-month increase of 2.29% in December 2023 and the highest monthly print since August 2023.

“We expect the MPC to highlight the sustained inflationary pressures due to the exchange rate pass-through effect, given the significant depreciation of the exchange rate and the jump in energy prices.

“The committee will also highlight the constant depletion of food supplies, exacerbated by increased conflicts in the food-producing region and urge the government to take immediate steps to alleviate the insecurity issues”, Cordros Capital Limited stated. #MPC: Firm Sees 1.50% Interest Rate Hike in Feb Meeting

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