MPC Raises Monetary Policy Rate by 50Bps to 27.25%

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September 24, 2024/InvestmentOne Report

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) held their fifth meeting of the year where they voted to:

–           Raise monetary policy rate (MPR) by 50bps to 27.25%.

–           Retain the Asymmetric corridor around the MPR at +500/-100bps.

–           Raise the Cash Reserve Ratio (CRR) of Commercial banks by 500bps to 50.00% and Merchant Banks by 200bps to 16.00%

–           Retain the Liquidity Ratio at 30.00%.

At the just concluded meeting of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), the MPC voted to raise the Monetary Policy Rate (MPR) by 50bps to 27.25%.

The committee noted that although annual headline inflation had trended downwards, core inflation remained elevated indicating persistent underlying inflationary pressure in the Nigerian  economy. The MPC acknowledged the relative stability and convergence of the exchange rate across the various market segments.

The committee reiterated the need to collaborate with the fiscal authorities to address the upward pressure on energy prices and expressed optimism around the Dangote refinery which will moderate food prices vis-à-vis transport cost. The lifting of Premium Motor Spirit (PMS) from the refinery is also expected to reduce FX demand pressure on the external reserves.

Furthermore, the MPC highlighted some upside risk to inflation including flooding, hike in energy prices, fuel scarcity and insecurity in the food producing region and stressed the need for the federal government to remain steadfast in addressing these risks. Importantly, the increase in MPR was also necessitated by the need to enhance competitiveness for foreign capital as real returns remained negative despite the recent moderation in headline inflation. Therefore, efforts must be sustained to achieve a positive real interest rate to improve the exchange rate.

The committee reiterated that the Nigerian banking industry remains safe, sound and stable.
Additionally, the MPC highlighted the strong correlation between the Federal Account Allocation Committee (FAAC) releases and liquidity levels in the banking system, as well as its impact on the foreign exchange rate. Going forward, FAAC releases will be closely monitored by the Apex bank.

The MPCs decision to raise the benchmark interest rate re-emphasizes the CBNs commitment to combat inflation and attract foreign capital into the Nigerian market. With inflationary pressures slightly abating in recent times, as evidenced by the deceleration of the consumer price index to 32.15% YoY in August 2024 – the first slowdown in 21 months amid Nigeria’s positive GDP growth trajectory, we expect the CBN to hold interest rate steady in its November 25th and 26th meeting.

Nevertheless, we see scope for a moderate 25bps increase in the MPR due to the current risks to inflation. Lastly, given that global central banks are now shifting towards a more accommodative stance, we suspect that the CBN may becoming less aggressive in its rate hikes.

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