This inflation expectation is likely to have far reaching consequences for the Monetary Policy Committee’s (MPC) upcoming meeting. In the most recent meeting, the committee highlighted the surge in inflation rate as one of the primary reasons for its decision. With inflation expected to begin to tread five/six-year highs from June, the MPC may be forced to consider further tightening stance in its July meeting. That said, we expect the MPC to argue that most of the current inflationary pressures are largely cost-push driven, in an attempt to reduce importance of further immediate rate hikes. In addition, the MPC may argue for the need to see the impact of the May hike on price stability before implementing further hikes. 

From our viewpoint, despite the stronger inflation driver being cost-push components, we note that demand-pull factors remain as strong inflation drivers while the artificially low naira interest rate environment is driving interest in FX-denominated assets, sustaining recent speculative activities in the FX market.  Thus, we see further room for a 100bps hike in the MPR in 2022 but with lack of clarity on the timing of the hikes. Our base case scenario is an increase in Capital Reserve Ratio in July meeting (but depends on the CBN’s willingness to allow interest rates find their level) and two 50bps hikes in September and November meetings.