November 23, 2022/CSL Research

• The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) raised the Monetary Policy Rate (MPR) by 100bps to 16.5% from 15.5% at the end of its final Monetary Policy Committee (MPC) meeting for the year 2022. Inflation remained the major consideration
• The MPC however kept all other parameters constant (asymmetric corridor of +100/-700 basis points around the MPR, the CRR at 32.5% and the Liquidity Ratio at 30%).
• We continue to reiterate that the continuous hike in rate will likely constrain the country’s fragile growth while achieving very little in combating inflation and attracting foreign inflows. That said, with inflation expected to moderate next year due to base effects, we believe the MPR rate will be retained at 16.5% at the first MPC meeting in 2023.

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) at the end of the final Monetary Policy Committee (MPC) meeting yesterday, raised the MPR for the fourth consecutive time to 16.5% from 15.5% previously. The CBN Governor noted that the decision to continue to tighten was predicated on the further increase in inflation numbers for the 9th consecutive month with headline inflation (year-on-year) rising to 21.09% in October 2022 from 20.77% in September 2022. He further stated that given the expected uptick in money supply associated with the forthcoming December festive season and the expected heavy spending during the 2023 general elections, a hold stance will halt the gains of the previous policy hikes. Furthermore, he noted that the option of loosening was not considered given the numerous headwinds the nation currently faces. Furthermore, the committee noted that though there was an uptick in inflation numbers, headline inflation decelerated on a month-on-month basis to 1.24% in October 2022 from 1.36% in September in response to the committee’s aggressive stance.

Interbank versus MPR

Source: CBN, CSL Research

Inflation: Inflation remains the key consideration for the persistent hike in MPR. The MPC remained concerned about the uptrend in inflation. Inflation increased for the ninth consecutive month with headline inflation (year-on-year) rising to 21.09% in October 2022 from 20.77% in September 2022. driven both by food (+38bps) and core inflation (+16bps). However, on month-on-month basis, headline inflation decelerated to 1.24% in October 2022 from 1.36% in September 2022. The Committee noted that though inflation numbers remained high, slowdown in month-on-month inflation numbers signalled its continuous rate hikes were beginning to yield fruit, making it important to sustain the momentum, hence the further hike in MPR. The CBN expects a surge in money supply as the festive season and the forthcoming 2023 general elections draw closer. The incoming price data for November (CSL estimates: 21.89%) is expected to remain high due to the impact of the recent floods, widespread insecurity and increased transport costs on food prices, currency depreciation and elevated energy prices. In our view, we expect the pass-through effect from the hike to continue to be minimal in the near term, as supply side factors remain the major drivers of the current inflation numbers. We further posit that the current naira redesign program embarked on by the CBN will help reduce the volume of money currently outside of the banking system (86% as at October 2022) and strengthen the impact of monetary policy measures.

Inflation rate (November – December are forecasts)

Source: NBS, CSL Research

Capital flows: The committee noted that global headwinds have continued unabated particularly with lockdowns in China, hence, the ongoing capital flow reversal from perceived higher risk emerging market securities to US dollar denominated securities with improved yields.  In our view, the expected further rise in interest rates would have little effect on FPI flows as foreign investors would likely remain sceptical of both FX liquidity and the exchange rate. Moreover, many FPIs will rather stay on the side-lines till the elections are over and they can see a clear policy shift or otherwise. That said, it may be successful in preventing further capital reversals.

Economic Growth: The committee remained comfortable with growth expectations, believing that the various monetary and fiscal interventions will continue to engender growth as the country recorded a Gross Domestic Product (GDP) growth of 3.54% y/y in real terms in the second quarter of 2022, up from 3.11% in Q1 2022. We posit that the aggressive rate hikes will likely impact the country’s growth negatively while having a minimal effect in combating inflation and attracting foreign inflows. In line with our view, the committee forecasts output growth will be sustained for the remaining part of the year, although at a subdued pace than earlier anticipated.

Stock Market: The equities market has been on the receiving end, witnessing sell-offs due to the persistent hikes in MPR. We expect the trend to continue with this latest hike. Barring any positive corporate actions and announcements, especially on the heavily weighted stocks that can boost investors’ sentiments, we expect the equities market to continue its bearish run, with investors tilting towards the fixed income market due to higher yields.  Investors will only pay attention to blue chip stocks.

Conclusion: Having embarked on an aggressive hike in the MPR with a cumulative 500bps in the year 2022, we anticipate a hold in the first quarter of 2023 as inflation moderates largely due to base effect. Moreover, contrary to the CBN’s view, we believe the recent month-on-month moderation in inflation was largely driven by the relative stability (m/m) in energy cost particularly as international crude oil price remained below the US$100 mark. Also, other commodity prices remained relatively stable. The FAO Food Price Index (FFPI) averaged 135.9 points in October 2022, virtually unchanged from September, with the price indices of all the covered commodity groups, except cereals, down month-on-month.