Sunday, May 28

MPC: Will the Nigerian CBN raise interest rates this week?

The decision of the first Monetary Policy Committee (MPC) for the year, is set to be announced today, 25th January 2022, which determines the monetary policy direction for the next two months and sets the tune for the year.

Economists and analysts alike are eagerly waiting to see the policy direction of the MPC of the Central Bank going into the new year, especially considering recent events in the local macro-economic space and global economy.

The concern is following the uptick in the country’s inflation numbers, which was released by the National Bureau of Statistics (NBS) last week, indicating that Nigeria’s headline inflation increased in the month of December 2022, having gone through eight months of moderations.

You would recall that the Central Bank, maintained a rather subtle monetary approach in the previous year, keeping the MPR at 11.5% and all other indicators constant through the year, in order to stimulate economic growth from the recession recorded in 2020. A move which saw Nigeria’s gross domestic product (GDP) grow by 0.51%, 5.01%, and 4.03% in Q1, Q2, and Q3 2021 respectively.

In the same vein, Nigeria’s headline inflation rate declined from a record high of 18.17% recorded in March 2021 to 15.4% in November 2021 albeit significantly higher than the apex bank’s implicit tolerance corridor of 6-9% and way above the benchmark policy rate of 11.5%.

Outcome of the previous meeting

  • The committee in the previous meeting had gratified that its policy actions had yielded positive results, sighting the improvement in the country’s GDP and the decline in inflation rate for eight consecutive months.
  • However, the members of the committee reiterated the need to remain cautious and urged both the monetary and fiscal authorities to sustain their support for the recovery, as the Pandemic was yet to be over.
  • According to the MPC, “the sustained intervention by the Bank, economic activities will normalize in the short to medium term, leading to improved output growth and lower inflationary pressure.”

The members of the committee during the last meeting voted unanimously to hold all rates having considered the upside and downside risks associated to the three policy options before them.

According to the communique of the meeting, the MPC were of the opinion that though the tightening of the MPR would further help to rein in inflation, it would however result to the increase in the cost of funds hereby containing output growth.

On the other hand, whereas loosening will lower policy rates, ease liquidity pressures, and stimulate additional credit creation which will boost output growth, MPC also thinks that loosening will further widen the negative real interest rate gap and compound the price distortions in the money markets which could fuel inflationary pressures.

Finally, the MPC believed that the existing monetary policy stance has supported the growth recovery and should be allowed to continue for a little longer for consolidation to achieve the MPC mandate of price stability that is conducive for sustainable growth.

What experts are saying

According to Ayorinde Akinloye, an Associate Investment Research Analyst at United Capital, while speaking to Arise tv on Friday, highlighted that he sees the MPC increasing interest rates although might not be in the first meeting but surely in the first quarter of 2022.

He highlighted that following the movement of the US Federal Reserve to increase rates faster than anticipated, it would be logical for Nigeria to follow suit so as to gain foreign investment edge when compared to other emerging economies.

He also pointed out that the MPC meeting will be considering the recent inflation numbers which spiked in December 2021, as he believes this could inform the next monetary policy direction of the CBN. Other factors he highlighted include the country’s economic growth and policy normalization in the global economy.

On the other hand, Opeoluwa Dapo-Thomas, a British-Nigerian Global market analyst believes the monetary policy committee will be maintaining the interest rate and would only consider the December inflation numbers as an outlier.

“I believe they will keep rate constant, and will see December inflation uptick as an outlier.” He also added that “they will maintain their approach but they will be seriously weighing other factors.”

Ugodre Obi-Chukwu, Financial Analyst and founder of Nairametrics opines the apex bank will keep interest rates unchanged.

“I suspect the CBN will keep rates unchanged when they meet this week. Whilst there are concerns around the rise in inflation rate recorded in last December, the CBN will probably see it as a blip rather than sticky. However, probable removal of fuel subsidy and future structural price increases could affect rate decisions in the coming months,” he opined.

What you know about the MPC

The MPC is a committee, consisting of the CBN governor, four deputy governors of the bank, two members of the board of directors of the CBN, three members appointed by the president and two members appointed by the governor.

The committee is charged with the responsibility within the CBN of formulating monetary and credit policy for the country.

Bottom line

The MPC meeting is a very important event for the country as the outcome determines the level of interest rates for the country, which affects the rate at which banks lend to their customers and serves as a measure for foreign investors in bringing their monies into Nigeria.