September 27, 2022/CSL Research
The Central Bank of Nigeria (CBN) will conclude its penultimate Monetary Policy Committee (MPC) meeting of the year today, and we believe the committee will maintain its hawkish stance, but we do not expect more than a 50bps increase. Also, we see the possibility of adjustments to other policy parameters such as the Cash Reserve Ratio (CRR), liquidity ratio or the asymmetric corridor. In our last MPC review note in July 2022, we indicated that judging by the MPC’s posture in the last two meetings, the CBN appears to be clearly prioritising its price control mandate over concerns around growth. The continuous hike in interest rates by global central banks will also put pressure on the CBN to maintain its hawkish stance, we believe.
A better than anticipated growth gives room for some comfort: At the last MPC meeting in July, the committee based the MPR decision on the Q1 2022 GDP growth of 3.11% and forecasted the economy will remain on a path of sustained growth through the year. We expect the better-than-expected Q2 2022 GDP growth of 3.54% to give the committee some comfort around growth. Also, both the Manufacturing and Non-Manufacturing Purchasing Managers’ Indices (PMIs) were above the 50-index point benchmark, coming in at 51.1 and 50.3 index points in June 2022, compared to 48.9 and 49.9 index points, respectively, in May 2022. Hence, we believe the CBN will continue to focus on reducing inflationary pressure while supporting the economy through its existing interventions to support growth.
Government borrowing costs will be a major concern too: The committee noted the federal government’s increasing debt profile and complained about debt sustainability in the last meeting. The latest data showed that Nigeria’s total public debt stock increased by 3.0% q/q to N42.85tn as of June 2022, and the country’s debt service to revenue ratio at 118.9% as of April 2022 reinforces the apex bank’s debt sustainability concerns. For as long as the international debt market remains unfavourable, the government is left with no choice but to look to local borrowings, meaning the CBN must keep an eye on interest rates so as not to worsen the government’s heightened borrowing costs.
Concerns around inflation would likely outweigh growth concerns: The headline inflation reached a 17-year high of 20.52% in August 2022, driven both by food (+110bps) and core inflation (+94bps). The August inflationary data will not be ignored at the MPC meeting. For one, the CBN expects election spending to intensify in the coming months. The incoming price data for September is expected to remain high due to the impact of increased fuel costs on food prices, currency depreciation and elevated energy prices. We however expect a slight moderation in food prices as the harvest season commences.
That said, we reiterate our stance that a rate hike will at best only help control inflation minimally since the supply side factors remain dominant. We also do not expect an increase in rate to result in an influx of Foreign Portfolio Investors (FPIs), which we believe is another of CBN’s motive for its hawkish stance. In our view, FX repatriation concerns remain foremost in the mind of FPIs. Moreover, many FPIs will rather stay on the sidelines till the elections are over. We also believe any further aggressive rate hikes will begin to constrain growth.
