…The MPC faced the pivotal decision – either maintain current rates to allow previous hikes to fully impact the economy or continue rate increases to reinforce gains from prior adjustments
TUE SEPT 24 2024-theGBJournal|The Monetary Policy Committee (MPC) of the Central Bank of Nigeria’s (CBN) Tuesday raised interest rates by more than expected, and amidst declining inflation figures.
The MPC faced the pivotal decision – either maintain current rates to allow previous hikes to fully impact the economy or continue rate increases to reinforce gains from prior adjustments owing to the elevated inflation risks exacerbated by the recent rise in PMS (petrol) price.
However, the Committee, after its meeting today voted to raise the Monetary Policy Rate (MPR) by 50bps to 27.25% (Previously: 26.75%), retain the asymmetric corridor at +500bps/-300bps, raise the CRR for Deposit Money Banks to 50.0% (Previously: 45.0%) and Merchant Banks to 16.0% (Previously: 14.0%), and retain liquidity rate at 30.0%.
Since the last meeting, domestic inflationary pressures slowed for two straight months primarily due to the high statistical base from last year’s corresponding period, slowing by a faster pace of 125bps to 32.15% y/y in August (July: -80bps to 33.40% y/y).
Similarly, economy maintained solid growth trajectory in Q2-24, driven primarily by a robust expansion in the oil sector (+10.15% y/y vs Q1-24: +5.70% y/y), and despite slow down in non-oil sector growth (+2.80% y/y vs Q1-24: +2.80% y/y).
Meanwhile, the baseline expectation is for the MPC to adopt a “HOLD” stance, as the Committee was expected to refer to the recent decline in headline inflation, even as inflation risks are now strongly tilted to the upside.
Additionally, the intensification of global monetary policy easing reduces the risk of capital flight from developing markets like Nigeria, lessening the pressure for defensive rate hikes.
The dovish signals from the CBN coming off the apex bank’s adjustment of the asymmetric corridor to +500/-100bps around the MPR was a flag that raised expectations for a HOLD.
Specifically, the CBN limited the Standing Deposit Facility (SDF) rate of 25.75% on deposits of up to N3 billion, with a fixed rate of 19.0% on excess deposits, thus discouraging banks’ utilisation of this window. As a result, fixed income yields have pared down over time.
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