The Central Bank of Nigeria (CBN) will hold its third Monetary Policy Committee (MPC) meeting in 2022 today and tomorrow, and we believe the committee will still tilt towards leaving the benchmark policy interest rate unchanged. However, we do not rule out the possibility of a 25bps or at most, 50bps hike given the current inflationary narrative and the relatively unattractive carry trade.
In our last MPC review note in March 2022, we noted that the direction of the MPR at the next MPC meeting in May will be highly dependent on the turn of events in the local and global space. Current local and global events rule out the possibility of a rate cut, leaving the MPC with either a hold or a rate hike.
Our prognosis is hinged on the fact that the persistent rise in inflation and the continuous hike in interest rates by global Central Banks which effectively reduces carry trade opportunities precludes a rate cut. On the other hand, a rate hike may not be effective in combating inflation and attracting FPIs since inflation remains largely supply-driven and FPIs will consider FX and political risks before a major comeback.
Again, growth concerns are expected to outweigh inflation concerns: At the last MPC meeting in March, the committee based the MPR decision on the Q4 2021 GDP growth of 3.98% and noted that the growth recovery was still fragile. Although, the economy has seen positive growth in the past 5 consecutive quarters, largely supported by base effects, the recent elevated energy prices amidst scarcity affected economic activities in the country in Q1 2022. Also, the low oil production in Q1 indicates another steep contraction for the oil sector in Q1 2022.
While the Manufacturing PMI has been above the 50-index point mark since November 2021 (50.8 index points) and was reported at 50.1 index points in February 2022, manufacturing activities have been low in recent times due to high costs and low demand. These, point to the fact that the upcoming policy will be clouded with concerns around growth and downside risks to the economic recovery, especially in light of the Russian-Ukraine war.
Government borrowing costs will be a major concern too: Since JPMorgan yanked off Nigeria from the overweight list of its emerging market sovereign recommendations, it is expected that the cost of borrowing externally will rise, Already, rates at the Eurobond market are high and we believe the government will want to resort to more local borrowings, meaning there will be little incentive to raise rates so as not to raise the government’s borrowing costs.
Inflation now at a faster pace and can not be ignored: The headline inflation sustained its upward direction for the third consecutive month and at this time, at a faster pace rising by 90bps in April to 16.82% y/y – the highest reading since August 2021, driven both by food (+117bps) and core inflation (+26bps). To a great extent, the April inflationary data can not be ignored at the MPC meeting and is likely to prompt more members to vote for a rate hike (four members out of ten members voted for a rate hike in March).
The incoming price data for May is expected to remain high due to the impact of increased fuel costs on food prices, low production that comes with the planting season and elevated energy prices. That said, we expect the CBN to continue to resort to its use of unorthordox measures (aggressive CRR debits) to control money supply, even as government borrowing is set to increase.
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