As global central bankers continue to combat rising headline inflation rate movements with monetary policy tightening, a slew of investment banking firms believe Nigeria will follow the same direction again after its fast and furious interest rate hikes in May, and then July 2022.
Ahead of the monetary policy meeting scheduled for next week, analysts at Cordros Capital have projected a 50 basis points increase in the monetary policy rate, anchored on the need to stem worsening inflation in Nigeria.
The last two benchmark interest rate hikes in Nigeria came surprisingly after two years of a dovish stance that kept the policy rate at 11.50%. Some market analysts said the first 1.50% interest rate hike was strong and unexpected due to weakening private sector performance.
Just two months after, the CBN also booked another 100 basis points, which lifted the policy rate to 14%.
Given the continued hawkish rendition of global central banks amid a comfortable level of domestic growth and persistent inflationary pressures, analysts said they are expecting the monetary policy committee (MPC) to increase the monetary policy rate (MPR) by at least 50 basis points.
Also, they projected an adjustment to the asymmetric corridor back to its pre-COVID level of +200/-500bps from +100/-700bps around the MPR. The policy committee is faced with the decision of holding or hiking the MPR further at a time global central banks are marching on with their interest rate hiking cycle despite the increasing risks to growth, according to Cordros Capital.
“When the Committee meets on the 26th and 27th of September, we expect it to assess the domestic and global economic environment, specifically the key economic and financial indicators since its last policy meeting”, analysts said in its macroeconomic note.
The investment firm said the Q2-22 growth print which printed at +3.54% year on year suggests the Committee could become cautiously comfortable with the growth levels, giving it a much-needed reason to maintain its fight against the stubbornly-high inflationary pressures.
More so, analysts noted that a sustained negative real interest rate could dampen domestic investments and undermine the stability of the local currency. “The more hawkish rendition from global central banks also supports the Committee towing the same path to reduce external pressures. Thus, we think further tightening is necessary to anchor inflation expectations”, analysts wrote.
In the second quarter of 2022, the domestic economy maintained its positive growth trajectory for the seventh consecutive quarter as the real gross domestic product (GDP) grew by 3.54% year on year compared with 3.11% in the first quarter.
Accordingly, the firm said it revised its growth estimate for Q3-22 upward to 2.90% year on year and expects the 2022 growth to settle at 3.01%. “We expect the Committee to be satisfied with the CBN’s unconventional monetary interventions in the real sector to sustain the growth trajectory but note the headwinds posed by the lingering Russia-Ukraine conflict and tightening global financial conditions”.
However, it noted that domestic inflationary pressures maintained an uptrend as the headline inflation increased by 88bps to 20.52% in August from 19.64% in July – the highest print since September 2005 when Nigeria’s inflation reading printed at 24.32%.
The inflation push reported by the statistics bureau was driven in part by surging food inflation amid the lingering challenges impeding food production and supply. On the other hand, core inflation notched higher by 94bps to 17.20% – the highest print since January 2017 when it was 17.87% year on year.
“We expect the Committee to remain concerned about the persisting inflationary pressures even as the primary harvest season is underway amid high input and fertilizer costs… we expect the Committee to urge the fiscal authority to sustain its real sector interventions and take decisive steps in tackling the structural challenges limiting food production in the country”.
On foreign exchange, analysts see no respite for the Nigerian naira which has dropped significantly in the last two months when the policy committee met. Pressures on the local currency have remained unrelenting, given limited FX supply at the official channels amidst increased FX demand underpinned by summer travels and political activities, according to analysts.
Analysts at Cordros Capital said they understand that travellers and manufacturers have continued to recourse to the parallel market as most of their FX needs remain unmet at the official windows.
Consequently, since the last policy meeting, the local currency depreciated by 2.8% to N436.25 at the Investors and Exporters Window (IEW) and by 12.3% to N709.00 at the parallel market as of 16 September.
Meanwhile, after reaching a six-month high in June, inflows to the IEW declined for the second consecutive month to USD931.20 million in August, down 29.9% from a level of USD1.33 billion seen in July.
“We highlight that the decline was driven by 31.8% decline in foreign currencies inflows across the local while foreign inflow source sinks 17.4% month on month… The inflow from the CBN which printed at USD51.10 million from USD93.0 million in July – the lowest since March 2021 (USD6.4 million).
It is also noted that the gross external reserve depleted by 1.9% to USD38.69 billion since the last policy meeting, reflecting CBN’s sustained FX interventions, albeit significantly below pre-pandemic levels, more so that inflows to the reserves have been limited.
“We expect the gross FX reserves at current levels to comfort the Committee that it has enough liquidity to maintain periodic FX intervention, though at a pace substantially below pre-pandemic levels.
“Nonetheless, we expect the Committee to admit near-term vulnerabilities in the external sector as pressures on commodities and fuel prices exacerbated by the lingering Russia-Ukraine conflict intensify”, analysts said in the note.