MPC meeting today: another Interest Rate hike on the horizon

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The Monetary Policy Committee of the Central Bank of Nigeria, MPC is expected to continue tightening its inflation-fighting measures when it meets for the last time this year due to the increasing inflation rate.

The current committee in its September meeting increased the MPR by 50 bps to 27.25 per cent its rationale revolves around; core inflation, money supply, fiscal deficits and food prices.

While headline inflation bore signs of easing the last time the MPC met, core inflation was still high courtesy of energy prices and other special factors.

The Governor of the CBN, Olayemi Cardoso, read out the following statement after the meeting: The members acknowledge the efforts being made by the Federal Government to ensure the protection of farming communities against insecurity and urged everyone to stay committed.

“Besides, the MPC commended the Federal Government for the ongoing effort to eradicate the food supply backlog through the duty-free importation of food items. The Committee also noted optimism that the lifting of refined petroleum products from the Dangote refinery will cause the cost of transport to deplete and would assist in a reduction of food price pressure in the short, and medium term.

“This is also expected to reduce forex demand for importation of refining petroleum products, thus having a positive ripple effect on external reserve and overall balance of payment,” part of the statement said.

Although, with the inflation rate having turned a corner and now on the rise, there are suggestions that the MPC may remain stubborn in its approach.

Analysts at Afrinvest said the MPC faces a difficult decision given the recent re-inflationary signals in major external economies, an uptick in domestic price levels, weaker Purchasing Managers’ Index readings, bureaucratic hindrance to Dangote’s supply of PMS locally, fiscal deficit build-up, and the sustained expansion in money supply (M3, the broadest measure of money supply, increased by 1.6 per cent m/m to N109.0tn in September).

In the latest PMI data released by the CBN for October, the composite PMI weakened to 49.6 points from 50.5 points in September, halting two consecutive months of broad-based expansion in the business environment.

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The underwhelming composite PMI print was driven by mixed outcomes across the three industry constituents – Industry sector PMI contracted to 49.3 points from 49.7 points, Services sector PMI stagnated at 50.0 points, while Agriculture sector PMI expanded albeit at a slower pace to 50.3 points from 51.4 points the prior month.

“We note that the contraction in Industry PMI was stoked by downbeat performance across key metrics, including New Orders (49.7), Employment (48.7), and Stock of Raw Materials (49.2). Among the 17 subsectors surveyed, Food, Beverage, and Tobacco products recorded the sharpest contraction, reflecting the dual shock of households’ depleting purchasing power and negative exchange rate movement on production cost (NGN/USD lost eight per cent m/m to ₦1,671.32/USD at NAFEM window in October),” the weekly report indicated.

The analysts noted that weak PMI data, inflation at 33.88 per cent, energy price increase (+2.2 per cent m/m),  foreign exchange volatility and fiscal pressures also intensifying, with the national debt profile hitting N134.3tn in H1 (approximately 52.0 per cent of GDP) with further possibility of exceeding N150.0tn in 2025, given the N13.5tn deficit projection in the Medium Term Expenditure Framework will be developments for the MPC to consider to arrive at a decision.

“Notwithstanding, the committee’s steadfast focus on curbing inflation and achieving positive real interest rate to attract foreign investment suggests that a further rate hike is imminent. Against this backdrop, we expect at least a 25bps increase to the MPR at the final policy meeting for the year next week Tuesday,” the analysts said.

Meristem Securities in their macroeconomic update said key global and domestic factors are likely to dominate the committee’s considerations.

“Externally, the disinflation trends have reversed in developed countries after credit easing to boost growth, the recent decline in oil prices and potential implications of these changes to the domestic economy. In the domestic economy, the committee will factor in inflationary trends; increased fiscal spending, and naira devaluation in official and parallel markets.

Such factors will probably underpin the policy reaction since the committee looks for price stability against the background of increasing fiscal costs due to the expansion of public expenditures. Fixed-income yields rise, yet today’s investor insists on even more returns putting pressure on the monetary sphere.

We anticipate that the MPC will pay much attention to price stability and exchange particularly with headline inflation continuing to experience an upward trend. The committee is likely to be a hawkish one and preferred a hike in interest rate to tame inflation, strengthen Naira and keep the interest of investors intact in Nigerian instruments.”

The Meristem analysts expected that the MPC would increase MPR by 50bps to 27.75 per cent and leave all other ratios constant.