The Economist Intelligence Unit (EIU) has projected that Nigeria’s Monetary Policy Rate (MPR) is expected to reach a peak of 23.75% this year.
This represents a significant 200 basis point adjustment above its prior forecast.
The adjustment comes after the Central Bank of Nigeria’s (CBN) monetary policy actions, which, according to the EIU, appear insufficient to maintain a positive real short-term interest rate amidst ongoing economic challenges.
- The report noted: “We now expect the Central Bank of Nigeria’s policy rate to peak at 23.75%. This is 200 basis points higher than our previous forecast.”
CBN may not deliver positive real short-term interest rate
The report doubts the CBN’s ability to achieve a positive real short-term interest rate without incurring significant political costs, particularly regarding unemployment.
Despite the CBN’s inclination towards inflation targeting, the EIU suggests that such a move would likely conflict with government economic policies and suffer from a lack of credibility, given the CBN’s history of unconventional policy decisions.
The analysis provided by the EIU further critiques the MPC’s prioritisation of economic growth over inflation control, hinting at the potential for political interference in policy decisions. Such dynamics raise concerns about the central bank’s strategy to effectively anchor inflation expectations within the country.
The report read:
- “In February the CBN held its first monetary policy committee (MPC) meeting since July 2023—a hiatus we believe was politically motivated and raised the policy rate by 400 basis points, to 22.75%, and the cash reserve requirement by 1,200 basis points. Another 100 basis points is likely to be added to the policy rate in 2024, assuming deficit monetisation continues and imported inflationary pressures remain strong. However, our core view is that the CBN will fail to deliver a positive real short-term interest rate as doing so would cause unemployment at a high political cost.
- “The CBN has mentioned a switch to inflation targeting, but as this would rub up against government economic policy and given the CBN’s record of unorthodox policy, such a framework would have little credibility in anchoring inflation expectations. The MPC attaches a large weight to economic growth, and policy will be subject to political interference.
- “Assuming inflation falls from 2025, we expect the CBN to begin unwinding its tight stance, with rate cuts beginning early in that year, despite inflation remaining above the ceiling of the CBN’s 6-9% target range. We expect the policy rate to fall to 12.5% in 2026 and remain there throughout the remainder of the forecast period.”
The report also underscored the dilemma faced by the CBN, noting that despite an increase in the policy rate in February, the overarching economic goals set by President Bola Tinubu, including a notable aversion to high-interest rates and the ambition to double GDP by 2031, may hinder the necessary monetary tightening to attract foreign investors.
This scenario is exacerbated by high inflation rates, eroding the real value of short-term interest rates and potentially leading to higher unemployment if aggressive monetary policies are adopted.
More Insights
- The next meeting of the MPC is expected to hold on March 25 and 26, 2024, with the likelihood of further tightening of the MPR.
- Fitch Ratings Inc. recently underscored the necessity for Nigeria to adopt more stringent monetary tightening measures to secure macroeconomic stability.
- However, the steep increase in the policy rate has sparked concerns regarding the potential impact on the cost of credit for businesses already facing economic hardships.
- The decision to hike the MPR, while crucial for tackling inflation and supporting the national currency, poses a dilemma as it may heighten the financial burden on struggling enterprises across the country.
