The Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) will likely further raise the benchmark interest rate Monetary Policy Rate (MPR) by 50bps to 14.5 per cent at its next meeting in September, analysts at Financial Derivatives Company (FDC) Limited, have said.
After holding the MPR constant at 11.5 per cent for about two and a half years, the MPC, citing the need to rein in inflation, had initially raised the benchmark interest rate to 13 per cent from 11.5 per cent at its meeting in May before subsequently hiking the rate by 100 basis points to 14 per cent at its meeting in July.
Although some financial experts argue that the MPC’s decision to hike rates at its last two meetings may not stem inflation, the FDC analysts in a report released over the weekend said they expect the CBN to continue with its monetary policy tightening for the rest of the year as part of measures to curb rising prices. They stated: “Headline inflation will surge to 19.7 per cent in July.
Although global inflation will begin to taper, Nigeria’s inflation will soar, revealing the underlying vulnerabilities. The most potent causative factors for price inflation in Nigeria today are exchange rate pass through (N667/$), the knock-on effect of the sharp increase in the price of diesel (N780/ litre) and to a limited extent the impact of money supply growth and saturation (N48.8trn).
“The naira will likely depreciate again towards the N695/$-N700/$ range at the parallel market. We expect that CBN will allow for a partial crawling peg in the forex market, and bring the I & E rate down to N440/$ in September.
“We also expect that the monetary tightening environment will prevail for the rest this year as the CBN prioritizes price stability over development financing. As part of its monetary tightening stance, the CBN will further raise the policy rate by 50bps to 14.5%p.a at its next meeting in September.”
Similarly, commenting on the latest data on FGN bond yields, analysts at FBNQuest stated in a note released last week that “last month, the monetary policy committee raised the monetary policy rate by a further 100bps to 14.0 per cent. Given the elevated outlook for inflation, we anticipate further rate hikes of at least 100bps by the end of 2022.
This should exert some upward pressure on yields across the curve.”