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Analysts predict that the Central Bank of Nigeria (CBN) is poised to maintain a tight monetary policy in 2024 as a strategic move to curb inflation, introducing measures such as interest rate hikes, increased Cash Reserve Requirements (CRR), and government bond sales.
Bismarck Rewane, the Managing Director/CEO of Financial Derivatives Company Limited, emphasized the importance of the CBN’s independence in ensuring price stability, indicating a probable escalation of monetary policy tightening in 2024.
The CBN initiated a series of interest rate hikes starting May 2022, culminating in a raise of the Monetary Policy Rate (MPR) from 11.5 percent to 18.75 percent in July 2023. This series of hikes aimed to combat inflation, currently at 27.33 percent as of October 2023, according to the National Bureau of Statistics (NBS).
Bismarck Rewane stressed the necessity for a wholesale auction system to enhance transparency in the foreign exchange market. He anticipated that central banks worldwide might initiate rate cuts in 2024 as inflation eases, potentially reducing capital flight in emerging markets like Nigeria and resulting in currency appreciation.
The Economist Intelligence Unit (EIU) echoed the sentiment that the CBN is likely to intensify monetary tightening in 2024, projecting a potential 300 basis points increase in the monetary policy rate to 21.75 percent next year. However, the EIU does not anticipate a positive real short-term interest rate in 2024, with potential passivity and political interference affecting policy choices.
Ayo Teriba, CEO of Economic Associates (EA), expressed skepticism about the effectiveness of the Monetary Policy Rate (MPR), suggesting a focus on stabilizing the exchange rate for the MPR to take effect. He emphasized that the pass-through effect of the exchange rate is a significant determinant of inflation.
While a tight monetary policy can have positive effects such as controlling inflation and strengthening the Naira, it also comes with potential negatives like increased borrowing costs, reduced investment, and limited job opportunities. The overall impact on ordinary Nigerians depends on individual circumstances, with some benefiting from lower inflation and a stronger currency, while others may face challenges due to higher interest rates and restricted access to loans.
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