September 27, 2022/United Capital Research

Today, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) will conclude its penultimate year meeting. Critical considerations at the meeting will include the unabating global hawkish monetary policy stance from significant central banks, persisting domestic and global inflation, economic growth considerations, the interest rate environment and currency preservation.

As in its preceding meetings, we expect statistics on inflation (CPI at 20.52% y/y in Aug-2022) and GDP (3.5% y/y growth in Q2-2022) to be at the core of deliberations. Rising inflation pressures on the domestic and global markets have been the CBN’s narrative for its recent hawkish stance at the last two meetings. The two months following the previous meeting have seen persistent inflationary pressures (19.6% y/y and 20.5% y/y in July and August 2022, respectively). Another critical consideration at the meeting will be the CBN’s ability to attract FPI flows.

Since the last meeting on 19-Jul, the Naira has lost 12.6% of its value in parallel markets and 1.7% in the I&E window, exchanged at N712/$ and N436.5/$, respectively. Moreover, FX flows from FPI has remained flat despite the rate hike, as the CBN remains the primary supplier of US Dollars in its official exchange window.

Also importantly, major central banks, including the U.S. Fed, Bank of England (BoE) and Swiss National Bank (SNB), all delivered rate hikes last week in the race to contain inflation. We expect increased hawkish monetary stances abroad to push the MPC’s decision towards a HIKE to temper capital flight. There are also concerns about increased borrowing rates domestically and narrowing spreads on interest rates of Nigerian sovereign bonds.

It is our view that the MPC will hike policy rates; We expect the MPC to hike the rate further in the range of 50bps- 100bps. Our outlook is predicated on a combination of the factors. Following our expected rate hike, we expect an uptick in interbank rates coupled with tightened system liquidity. For the domestic equity market, we expect a potential rate hike to fuel the bear market.