As the Central Bank of Nigeria (CBN) concludes its third Monetary Policy Committee (MPC) meeting of the year today, we expect a very moderate 25 basis points increase in the Monetary Policy Rate (MPR).
We, however, expect the other policy parameters such as the Cash Reserve Ratio (CRR), liquidity ratio and asymmetric corridor to remain unchanged.
We also believe that the MPC will continue to toll the way of other advanced countries such as the Bank of England and the Federal Reserve which have increased their interest rate by 25bps. We expect price pressures, elevated interest rates in advanced countries and the need to attract foreign portfolio investors (FPIs) to remain top on the committee’s mind as the CBN has been prioritising these concerns over growth.
No worries about economic growth
The committee believes that the economy has maintained a growth trajectory for nine consecutive quarters, since exiting the recession in 2020.
The improved performance has been largely driven by sustained growth in the services and agricultural sectors amidst a decline in oil revenues.
The committee believes output growth has been sustained by a combination of development finance interventions by the Bank and fiscal stimulus by the Federal Government. We, however, believe that continuous rate hikes will continue to limit and put the country’s fragile growth at risk while doing little to stem inflation.
The need to attract foreign capital inflows
Capital inflows continue to decline, and this remains a key concern for the committee. The elevated interest rates by global central banks have continued to reinforce flight to safety as foreign portfolio investors shed their investment portfolio in emerging markets and developing economies in favour of safer haven advanced economies.
Again, FX concerns and the inability of FPIs to repatriate funds in recent years, amidst poor economic indices continue to deter portfolio investments. The Nigerian equities market has remained bearish with the total foreign portfolio decreasing from N122.53 billion to N8.47 billion between April 2018 and April 2023.
We believe that concerns around foreign exchange stability and liquidity will continue to pressure foreign portfolio inflows in the medium to long term.
Inflationary pressures likely to drive another MPR hike
The headline inflation maintained its upward trend in April, increasing by 18bps to 22.22%, driven by 16bps and 28bps increases in food and core inflation.
We believe the inflation rate at this level still falls below CBN’s expectations, hence we eliminate the possibility of a rate cut. Moreover, the CBN will likely toe the line of its global peers, hence, we anticipate a 25bps increase in the Monetary Policy Rate.
That said, we reiterate that the rate hikes have had a minimal effect on inflation as supply-side factors remain dominant, We also reiterate that exchange rate stability and FX repatriation concerns remain ahead of any carry trade opportunities in the mind of Foreign Portfolio Investors (FPIs).
In our view, the continuous rate hikes have stifled the country’s fragile growth much more than any associated benefits.