There are strong indications that the Central Bank of Nigeria (CBN) may hold the benchmark interest rate at 22.75 in the March 2024 Monetary Policy Committee Meeting, holding 25th and 26th of March, 2024 in Abuja.
Recall the CBN had in the February 2024 MPC meeting raised the MPR by 400 basis points to 22.75 from 18.75 percent.
In taking the decision, the CBN said it was chiefly to reign in on inflation that had peaked at 29.90% following shocks from the devaluation of the naira, rising commodity prices, and sustained weakening of the naira.
The CBN communique had read: “Headline inflation (year-on-year) rose to 29.90 percent in January 2024 from 28.92 percent in December 2023. Food inflation increased to 35.41 percent from 33.93 percent while core inflation (Headline less farm produce and energy) rose to 23.59 percent from 23.07 percent. The major factors driving inflationary pressure remain exchange rate pass-through, rising cost of energy, high fiscal deficits, and lingering security challenges in major food-producing areas. In addition, global factors such as tight financial conditions and trade disruptions from ongoing geopolitical tensions, remain significant upside risks to the outlook for domestic inflation. Staff forecasts therefore indicate that inflation will remain on an upward trajectory in the near term before commencing a descent.”
Thus, even with the raised MPR, inflation has maintained a steady increase in line with the CBN forecast. In February 2024, the headline inflation rate increased to 31.70% relative to the January 2024 headline inflation rate which was 29.90%. food inflation also to over 37 percent.
Based on the above, our correspondent gathered that the CBN is unlikely to raise the MPR further as it would want a crystallization of the prevailing lending rate and assess the marginal impact on inflation. Also, a reduced MPR might induce more money in the economy as the incentive to save will be low and lenders will give more credit fueling consumption and even production. However, inflation might still get a bashing. How do we fix the quagmire? Also, portfolio investors might not find Nigeria’s market unattractive compared to the economies of Western countries with a more stable economic outlook.
David Aku, a financial analyst based in Enugu advocates against a further raising of the benchmark interest rate at this time as it might stifle growth.
He told our correspondent that tinkering with the benchmark interest rate would confuse the market and send shocks down the economy.
“Leaving the interest rate at 22.75 percent will give investors, locally and internationally the confidence to make projections, at least for the next two months when another MPR would hold, as per the timetable released by the CBN. A rise in MPR will still create uncertainty and stifle growth as credit would be considered too expensive.
Mr. Aku argued that with the naira gaining value daily against the greenback, it will make sense if the CBN studies how the inflationary pressures will respond as well.
Nick Agule, a financial analyst opined it is in the better interest of the economy if the CBN lowers interest rate at this time.
“If you lower rates, credit will become cheaper and people will most likely borrow to invest in agriculture. This will impact positively on food inflation. Yes, there’s insecurity but it’s not all places that are impacted” he stated adding that with reduced food inflation, headline inflation would also drop.
He remarked further that “the CBN does not need to play safe because that’ll eventually kill the economy. The CBN should go aggressive by cutting rates, inflation will spike but so will production and jobs and this will eventually get us to the promised land. By hiking rates why production is this low, inflation will continue to spike with no end in sight” he emphasized.
But what would the CBN decision be on Tuesday after the MPC meeting? We wait on baited breath.
