Interest rate hike likely again as MPC meets today

The Monetary Policy Committee of the Central Bank of Nigeria is projected to maintain its inflation-tightening stance at its last meeting of the year in the face of rising inflation.

At its September meeting, the Committee raised the Monetary Policy Rate by 50bps to 27.25 per cent, emphasising concerns over core inflation, money supply growth, fiscal deficits, and food price pressures.

Although headline inflation was trending downward at the time of the last MPC meeting, core inflation remained elevated, driven by energy costs and other structural factors.

In the statement read after the meeting, the Governor of the CBN, Olayemi Cardoso, said the members recognised the efforts of the Federal Government in addressing insecurity in farming communities and stressed the need to remain steadfast.

“In addition, the MPC applauded the ongoing effort of the Federal Government to bridge the food supply deficit through the duty-free import window for food commodities. The Committee also expressed optimism that lifting refined petroleum products from Dangote refinery will moderate transportation costs and significantly support the easing of food price pressures in the short to medium term.

“This is also expected to moderate foreign exchange demand for the importation of refined petroleum products, with a positive spillover on external reserves and an improvement in the overall balance of payment,” part of the statement read.

However, with inflation now on an upward movement, analysts have said that the MPC may maintain its hawkish stance.

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.

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.

“On the global scene, the reversal of disinflationary trends in advanced economies, following rate cuts aimed at stimulating growth, the recent decline in oil prices, and the possible repercussions of these developments on the domestic economy. In the domestic economy, rising inflation will be a key factor influencing the committee’s decisions, alongside heightened fiscal spending and the ongoing naira depreciation in both official and parallel markets.

“These considerations will likely shape the policy response, as the committee seeks to balance price stability with the fiscal pressures stemming from expanded public expenditures. Despite elevated fixed-income yields, investors continue to demand higher returns, intensifying pressure on the monetary landscape.

“We expect the MPC to focus on price stability and exchange management, given the persistent upward trend in headline inflation. The committee is likely to adopt a hawkish stance, opting for a rate hike to curb inflationary pressures, stabilize the Naira, and sustain investor interest in Nigeria’s fixed-income instruments.”

The Meristem analysts projected that the MPC will hike MPR by 50bps to 27.75 per cent and retain all other indices.