Weak naira, rising inflation signal further rate hike

Nigeria’s Monetary Policy Committee (MPC) is likely to raise interest rates when it meets next week, following the renewed pressure on the naira and rising inflation.

The naira has gone from the world’s best performing currency in March to the worst in April as dollar inflows thin. The currency exchanges between a rate of N1,400 and N1,440 per US dollar at the official and unofficial FX markets, after reversing gains made in March that saw it hit a high of N1,000.

Inflation, meanwhile, accelerated to 33.2 percent in March 2024 compared to 31.7 percent in February 2024, according to the latest data from the National Bureau of Statistics (NBS).

Most of the analysts polled by BusinessDay expect another increase in the interest rate, also known as the Monetary Policy Rate (MPR), as the MPC meets on May 20 and 21, 2024.

“Another rate hike perhaps to help encourage a stronger naira, which is the best way to get inflation down,” Charlie Robertson, head of Macro Strategy FIM Partners UK Ltd, said

The CBN expects inflation to peak by June, providing it a chance to hit the brakes on rate hikes which now sits at a record 24.75 percent following a combined 600 basis points hike this year.

But the rate shows no signs of slowing just yet, at least not in April.

Uche Uwaleke, professor of Capital Market at the Nasarawa State University Keffi, said the MPC is likely to increase MPR by at least 100 basis points at the meeting this month.

“They had raised it by 4 percent in February and added 2 percent in March. In line with the tightening stance of the CBN, we should expect another increase of at least 1 percentage point,” Uwaleke said.

“Inflation rose year on year in March despite the hike in February and the exchange rate has yet to stabilise. So, MPC will still be concerned about the need to narrow the negative interest rate,” Uwaleke said.

Economists polled by BusinessDay all predict inflation to rise further in April, putting pressure on the CBN to respond with another rate hike. However with the inflation rate close to its peak, the CBN may adopt a wait-and-see approach before raising rates.

“We think headline CPI edged up to 33.7 percent year/year in April from 33.2 percent in March,” Razia Khan, managing director, Chief Economist, Africa and Middle East Global Research, said

“In month/month terms, this likely reflected slower price gains, 2.3 percent m/m, from an average of 2.9 percent Year-To-Date,” Khan said.

CBN’s recent tightening measures, including adjustments to the Standing Deposit Facility rate, implemented at the end of March, have contributed to a stabilising effect on prices.

However, Khan warns that the full impact of these measures may not be fully realised for several months, but says the measures may provide enough comfort for the CBN to hold off another rate hike

While the full effect of the CBN’s tightening may not feed through for some months, we think headline inflation may now be close to its peak, suggesting little need for the CBN to raise its policy rate further,” Khan said.

Despite indications that headline inflation may be nearing its peak, Khan emphasises the lingering uncertainty in Nigeria’s inflation outlook.

Factors such as a recent fuel shortage, prompting speculation of potential fuel price adjustments, and fluctuations in the USD-NGN exchange rate due to profit-taking by foreign portfolio investors, add complexity to the economic landscape.

Market concerns are further amplified by the impending maturity of approximately USD 1.3 billion equivalent Nigerian Naira (NGN) futures on May 29th. Nevertheless, Khan suggests a glimmer of relief in the form of the state-owned oil company’s forward sale of oil, totaling USD 1.1 billion in May. Additionally, a new CBN circular indicates a potential shift in International Oil Companies’ selling mechanisms, which may alleviate pressure on the foreign exchange market.

With these dynamics at play, analysts are deliberating the necessity for further policy rate adjustments by the CBN. While Khan underscores the possibility of inflation nearing its zenith, the broader economic landscape remains fraught with uncertainties, warranting a cautious approach by monetary authorities

For Chinazom Izuora, Senior Associate, Parthian Securities, “The month-on-month slowdown in inflation observed between February versus March inflation figures was a glimmer of hope that the monetary policy initiatives to curb inflation were heading in the right direction however the actions of other regulatory agencies, such as the electricity tariff hike, increased the burden on businesses and households so we expect the May inflation numbers to be critical to the MPC decision.

She said, higher interest rates translates to higher cost of funds and finance costs so in light of rising cost of living due to electricity and fuel costs, another hike at this point is likely to spur inflation rather than dampen it so my expectation is for the MPC to hold at this point and revisit hiking rates at subsequent meetings.

Uwaleke, who said he expected a hike, also said he would vote for a hold if he were an MPC member.

“Nevertheless, if I were a member of the MPC, I would vote for a hold position as the aggressive policy rate hike is taking a toll on output. Production is stifled because of the very high cost of funds. Moreover, the seeming over reliance on the MPR as a tool to tame inflation does not appear to be making any meaningful impact due to the significant non-monetary factors driving inflation in Nigeria such as high cost of energy, transport as well as insecurity in the food-belt regions of the country,” Uwaleke said

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