- Central Bank’s Monetary Policy Committee (MPC) is expected to make key policy decisions as it concludes its fourth meeting of the year
- Despite CBN’s money-tightening stance, inflation has continued to soar
- MPC’s decisions will border on efforts to rein in inflation, shore up the naira and control excess liquidity
Ahead of the decision of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), there are speculations of tough policy decisions before the committee due to the economic situation of the country.
These decisions include the Monetary Policy Rate (interest rate), Cash Reserve Ratio (CRR) and other broad monetary policy options.
The MPC began its 296th and fourth meeting for the year on Monday, July 22 and expected to conclude and present its decisions today, July 23.
Despite the MPC’s interest hikes in the past, aimed at discouraging borrowing, curbing excess liquidity and ultimately taming inflation, inflation has remained intractable, reaching a new 28-year high in June 2024 at 34.19 per cent.
Similarly, food inflation rose in June 2024 to 40.87 per cent compared to the figure recorded in May 2024, which was 40.66 per cent, representing a month-on-month increase of 0.21 per cent.
CBN governor, Olayemi Cardoso, during the MPC meeting in March, pointed at government purchases of palliatives as a contributing factor to rising food prices in the country.
He noted that it was necessary to combine monetary policy with fiscal measures and structural reforms, especially in agriculture, electricity and energy sectors in order to achieve long-term investment and sustainable economic growth.
Cardoso said, “In the prevailing circumstances, it is my view that the argument for a further hike in Monetary Policy Rate (MPR) to complement the rate hike at the last MPC meeting is valid. This increase in the MPR will help curb inflationary pressure and reduce the negative real policy rate.
“Most importantly, it will further strengthen the anti-inflationary signal of the Central Bank of Nigeria (CBN) as we transition to an inflation-targeting regime.
“This, however, is predicated on the assumption that sustained fiscal and monetary policy coordination will result in policies that address the multitude of structural factors required for long-term investment and economic growth in Nigeria.
“Without addressing the structural issues in agriculture, electricity and energy sectors, we may continue to see persistent increases in food inflation.”
On this basis, analysts believe the committee might consider further interest rate hike. The rate has been increased by 650 basis points (bps) since the beginning of the year. After the MPC meeting in May, the MPR was increased to 26.25 per cent.
Finance and economic experts at Afrinvest (West) Africa Limited, an investment banking and advisory firm, said,
“We perceive that the committee would likely sustain hawkish tone with further 50 basis points (bps) to 100bps hike in the Monetary Policy Rate (MPR) even though we believe a policy hold is more appropriate at this point on the balance of factors consideration.”
Strategies to tackle naira depreciation to be discussed
Also, naira depreciation of the naira, especially in the first half of the year, despite CBN’s efforts, is another point of consideration for the MPC. On Monday, July 22, the naira closed at N1,500.32/$ on the official market and N1,565/$ at the Bureaux De Change (BDCs) segment of the foreign exchange market.
The recent foreign exchange sales to BDCs by the CBN to the tune of $106 million also has analysts predicting that the naira will stabilise at around N1,500 in the second half of the year.
In their half-year economic outlook, titled, ‘Balancing Act: Nigeria’s Path to Economic Stability,’ released at the weekend, analysts at United Capital said,
“The CBN will continue to intervene in the forex market; nevertheless, due to lack of confidence, hoarding and speculation, the naira will remain weak for the remaining part of the year.
“Notably, due to CBN’s efforts at increasing forex inflows into the economy, curbing speculation and hoarding activities, we expect the naira to moderate at N1,500/$ in H2 2024.”
Interest rate hike hasn’t stopped money supply
The monetary tightening approach of the CBN has also failed to address money supply (M3). As of May, Nigeria’s money supply (M3) reached a new peak of N99.24 trillion, according to money and credit statistics data by the CBN.
M3 typically refers to bot net foreign assets and net domestic assets and gives a holistic view of a nation’s monetary dynamics.
There is also M1 (very liquid monies such as cash, checkable (demand) deposits and traveller’s checks) plus CBN bills, and M2, which represents currency outside banks plus demand deposits and quasi-money (investments).
The CBN data showed a month-on-month (m-o-m) increase of two per cent from N96.97 trillion the previous month and a year-on-year (y-o-y) growth of 78 per cent from N55.69 trillion in the same month of the previous year.
The surge in M3 is a pointer to underlying factors driving liquidity growth, which may also include government spending.
It is also an indication of increased money flow in the financial system, which can potentially stimulate economic growth.
With the discordance in monetary and fiscal policies, the CBN governor assured that both monetary and fiscal authorities would work towards policy harmonisation to ensure a more effective framework for coordinating economic governance.
Rising food prices pushes headline inflation rate to 34.19%, food inflation to 40.87%
Meanwhile, TheRadar had reported that the increasing prices of food pushed Nigeria’s headline inflation rate to a new 28-year high of 34.19 per cent in June 2024.
According to data released by the National Bureau of State Statistics (NBS) on Monday, July 15, the June rate is 0.24 percentage points higher than the 33.95 per cent recorded in May 2024.
