July 23, 2024/CSL Research
The Central Bank of Nigeria (CBN) is anticipated to sustain its contractionary monetary measures as it concludes its fourth Monetary Policy Committee (MPC) meeting of the year. Price pressures and the need to attract foreign portfolio investments (FPIs) remain top priorities for the monetary policy committee.
Headline inflation continued its upward trend in July, rising to 34.19% in June, 24 basis points higher than the 33.95% recorded in May.
Additionally, weak capital inflows amid heightened seasonal demand have kept the Naira pressured and will likely prompt the MPC to implement a final rate hike of 50-100 basis points (bps) for the year. After this anticipated adjustment, we expect the CBN to maintain the MPR for the remainder of the year as the rate hikes have significantly increased borrowing costs for manufacturers and business owners, who are also grappling with the effects of the Naira devaluation.
Headline inflation resumed its upward trend in July, rising to 34.19% in June, 24 basis points higher than the 33.95% recorded in May, and 1,140 basis points higher than the 22.79% recorded in June 2023. This increase was driven by both food and core inflation.
Despite the Central Bank of Nigeria’s (CBN) efforts to control inflation through a cumulative increase of 1,475 basis points in the Monetary Policy Rate (MPR) since May 2022, these measures have had minimal impact. Although a moderation in headline inflation rates is expected in the second half of the year due to base effects, it is anticipated that the headline inflation rate will end the year well above the CBN’s target of 21.4%. This likely outcome will diminish any plans for easing monetary policy.
Cautious optimism around emerging market assets, coupled with the ongoing lack of a clear and sustainable solution to Nigeria’s FX crisis, continues to limit foreign exchange inflows into the country amid seasonal demand pressure. This heightened demand, combined with weak FX inflows, has kept the Naira under pressure in recent weeks.
The exchange rate closed at N1500.32/US$, compared to N1468.99/US$ at the last MPC meeting, likely prompting a final rate hike. Earlier this year, there were indications of increased foreign inflows; however, we have observed a slowdown in recent months. Foreign investors are likely to remain cautious as they seek clarity on the country’s foreign exchange market.
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