September 23, 2024/CSL Research
As the Central Bank of Nigeria (CBN) holds its fifth Monetary Policy Committee (MPC) meeting of the year today and tomorrow, we expect the committee to keep the Monetary Policy Rate (MPR) unchanged at 26.75%. Although inflationary pressures persist, the recent decline in inflation over the past two months—slowing from 34.19% in June to 33.4% in July, and further to 32.15% in August—may provide the MPC with sufficient reason to maintain the current rate.
The Naira continues to face pressure due to weak capital inflows and increased seasonal demand, with the exchange rate closing at N1541.52/US$, up from N1497.42/US$ at the last MPC meeting. However, the recent decision by the U.S. Federal Reserve to unexpectedly cut its benchmark interest rate by 50 basis points to the 4.75%-5.00% range could influence the MPC to hold rates. Lower U.S. rates typically reduce the yield on U.S. assets, prompting capital flows into emerging markets like Nigeria. This potential inflow could strengthen the Naira and ease exchange rate pressures, offering the MPC additional justification to maintain rates.
Additionally, record-high interest rates have significantly increased borrowing costs, particularly for manufacturing companies, adding financial strain. The committee may therefore be hesitant to raise rates further. However, despite the recent inflation slowdown and the potential for stronger capital inflows following the U.S. Fed rate cut, a premature rate reduction could undermine the progress made—especially given the recent fuel price adjustments. As such, a rate cut is unlikely at this time.
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