By Chinwendu Obienyi
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) faces a pivotal decision regarding the monetary policy rate (MPR), which financial markets and other economic players eagerly await today.
The decision comes at a time the country is grappling with scathing economic challenges such as inflation, currency fluctuations, and fiscal pressures. The MPR, which is a key tool used by the CBN to control inflation and stabilise the economy, will have significant implications for various sectors, including banking, investments, and consumer spending.
As expected, the MPC will assess recent developments in the global and domestic economies since the last policy meeting. Looking at the global economy, interest rates have remained elevated. However, central banks are beginning to pivot to monetary policy easing as global inflation approaches set targets.
Inflation
On the domestic front, precisely in June 2024, headline inflation increased further in June, rising by 24 basis points (bps) to 34.19% year-on-year (y/y) as against May’s figure of 33.95% y/y) primarily due to the exchange rate pass-through on commodity prices, high energy prices and increased food shortages.
Similarly, the month-on-month (m/m) inflation print came in at 2.31% m/m (+2.14% y/y), owing to higher food prices following the increased consumer demand from the Eid-el-Kabir celebration. As a result, food inflation rose by 27bps to 2.55% m/m (May: +2.28% m/m), pushing the y/y rate higher to 40.87% (May: 40.66% y/y). Over the past year, food prices in Nigeria have soared, driven by factors such as supply chain disruptions, currency depreciation, and the impact of climate change on agriculture. This has led to basic staples like rice, beans, and vegetables becoming increasingly unaffordable for the average Nigerian, stretching household budgets to their limits
Similarly, core inflation rose, albeit moderately, by 5bps to 2.06% m/m (May: +2.01% m/m) following the slight naira depreciation amid a slower increase in energy prices. On a year-on-year basis, core inflation rose by 36bps to 27.40% y/y. In response to the ongoing inflationary pressures, the federal government unveiled a comprehensive plan for 2024, focusing on the six-month suspension of import duties, Value Added Tax (VAT), and other tariffs on staple food items, raw materials, and direct inputs for manufacturing. This ambitious agricultural reform programme aims to enhance domestic food production.
Naira volatility
The naira has remained volatile in recent weeks mainly due to the tight liquidity in the FX market. Precisely, the CBN sustained its weak FX intervention, while foreign investors stayed on the sidelines mainly due to convertibility risk concerns, causing FX liquidity to dwindle. Indeed, total inflows into NAFEM in June fell significantly by 53.7% m/m to $1.45 billion when compared with$3.12 billion recorded in the previous month– the lowest since January 2024 ($1.03 billion).
So far in July, whilst liquidity improved mildly aligned with the CBN supplying $122.67 million, the naira remains under pressure and approaching the NGN1,600.00/$1 handle as demand for FX continues to outweigh supply.
Conversely, there has been sustained accretion to the FX reserves as the balance reached a 16-month high of $35.93 billion (as of 18 July), primarily supported by the disbursement of the first tranche ($750 million) of the Development for Financing (DPF) loan ($1.50 billion) from the World Bank, improved earnings from oil exports, FX purchases from FPIs and increased remittances.
FG’s proposed tax on FX gains
This is expected to generate discourse especially amongst analysts who will seek clarification as to how this tax works. Already, investors are selling off their investments in banks’ stocks owing to uncertainty on how the recapitalization exercise would fare for these banks quoted on the floor of the Nigerian Exchange Limited (NGX). As at July 20, the banking index was in the negative territory, down by 5.93% year-to-date.
Financial analysts’ projections
Analysts who spoke to Daily Sun via emailed notes, stated that the apex bank will need to balance the goal of controlling inflation with the need to support economic growth as a higher MPR could dampen economic activity, while a lower rate might boost growth but risk higher inflation.
The Chief Executive Officer, Cowry Asset Management Limited, Johnson Chukwu, believes that these government measures, while ambitious, aim to provide much-needed relief from the current inflationary grip, potentially reviving hope among Nigerians and fostering a more prosperous and optimistic marketplace.
He, however, said that the effectiveness of these initiatives in delivering tangible benefits remains to be seen. Chukwu said, “With the monetary policy committee meeting today, the CBN faces a dilemma: whether to continue tightening monetary policy or adopt a more cautious approach to monitor inflationary trends and key economic indicators.
We anticipate that a moderate increase in headline inflation will likely lead committee members to favour maintaining a tightening stance, potentially raising rates by 25 to 50 basis points”.
Corroborating, analysts at Cordros Research, said that they expect the MPC to maintain their tight monetary policy stance at next week’s meetingAccording to them, this will be hinged on the goal to ensure price stability, reduce the negative real rate of return, manage inflation expectations, and stabilize the naira.
They said, “However, given the slower pace of the increase in the inflation rate and an anticipated disinflation trend for the remainder of the year, we foresee a moderate increase than in previous meetings. Therefore, we anticipate the MPC will raise the MPR by 100 basis points to 27.25% while keeping other parameters unchanged”.
