MPC: Analysts Caution against Interest Rate Increase

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Festus Akanbi

As the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) begins its first meeting for the year 2022, in Abuja tomorrow, economic analysts have advised against hike in the Monetary Policy Rate (MPR) despite the mounting pressure on the apex bank to announce a higher rate.

MPR was retained at 11.5 per cent at its September 2021 meeting.

MPR is the interest rate at which CBN lends to the commercial banks. The MPR is the benchmark against which other lending rates in the economy are pegged and is usually used as an instrument to moderate inflation in the economy.

In their forecast of the outcome of the MPC meeting, analysts from Financial Derivatives Company Limited (FDC), Cordros Capital Limited and Cowry Asset Management Company Limited, in separate reports, released last week, believed that the current pressure on the CBN is not enough to cause an upset in the nation’s interest rate regime.

According to them, issues putting pressure on the MPC to increase benchmark rate include an upward inflationary pressure amid the anticipation of subsidy removal, increasing electricity tariff, foreign exchange volatility and the intending rate hike by Federal Reserve in 2022.

The pressure was fueled by the latest headline inflation figure, which broke away from the eight-month declining trend to rise by 0.23 per cent to 15.63 per cent from 15.4 per cent in November 2021.

This increase in inflation figure, according to the report by Financial Derivatives Company, now increases the probability of a rate hike, even though it is highly unlikely this time. The CBN had maintained the status quo 25 times in the last 28 meetings.

The report did not rule out further increases in domestic inflation in the coming months.
It however insisted that the monetary policy committee may not yield to the temptation of tampering with the current rate.

“We expect domestic inflation to increase further in the coming months due to the imminent removal of petrol subsidy and the planting season effect amongst other factors. This increases the chances of a tighter monetary policy stance although it is highly unlikely at this time,” the report stated.

In their report, analysts from Cordros Capital said despite the reality of the current inflationary trends, the CBN may prefer to exercise some restraints to allow previous policy actions to permeate the economy instead of falling to the temptation to raise interest rates.

“The uptick in headline inflation in December (2021) will likely stir up a debate among Committee members about whether it is a blip or a trend that will persist in the coming months.

For us, the significance of this meeting is primarily predicated on the body language of the Committee regarding the timing of the shift to a hawkish monetary stance. Like the November meeting in the prior year, we expect the Committee to affirm its view on monitoring the policy actions of global central banks before commencing its tightening cycle.

“Given the negative output gap and sub-optimal PMI readings, our baseline, the expectation is that the MPC will judge the need to allow previous policy actions to permeate the economy.
“Accordingly, the Committee is likely to assess that tightening at this meeting will be “too early” and counterproductive. Thus, we expect the MPC to maintain the status quo on all monetary policy parameters. However, we expect the Committee to strike a hawkish tone in light of the gradual tightening in global financing conditions even as inflation remains above the CBN’s medium-term target of six per cent to nine per cent.”

The report called for the sustenance of the growth momentum as the impact of the favourable base from the prior year dissipates. “As a result, we project the economy would grow by 2.44 per cent y/y and 2.10 per cent y/y in Q4-21 and Q1-22, respectively. Accordingly, we expect the committee to reiterate the need for CBN to maintain its current interventions to sustain the recovery of output growth, more so that the PMI readings remain sub-optimal. Therefore, we believe the fragile recovery process would induce the committee to maintain its dovish stance,” the report stated, adding that the committee will feel the committee needs to maintain its monetary policy stance to allow its interventions to continue to support improvement in aggregate food supply and, by extension, drive down prices.”

Dismissing the possibility of a raise hike, analysts from Cowry Research note that an increase in MPR would hamper economic growth.

“Our expectation on retention of policy rate centres more on the fact that Nigeria’s inflationary pressure is chiefly cost-push, which would be aggravated if the cost of funding goes higher again – especially for the manufacturers who would pass on the additional cost to their customers. We believe that the monetary policymaker would see pre-election aggravated demand-pull inflationary pressure as transient. Hence, we anticipate an upward trend in stop rates and yields on debt securities, to retain investment in Naira, denominated assets,” the report from Cowry Asset Management stated.

According to Emefiele, the committee in September 2021 unanimously voted to maintain the key lending rate at 11.5 per cent, with the asymmetric corridor of +100 and -700 basis points around the MPR. The CBN MPC noted that holding stance would allow current recovery in output and decline inflation continue.