Analysts expect MPC members to hold rates despite external sector pressures

A group of analysts at Cordros Research have predicted that the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) may retain the interest rate or Monetary Policy Rate (MPR) at 11.5per cent alongside other monetary policy parameters.

They also expected the Committee to strike a hawkish tone in light of the tightening of monetary policy by global central banks and the indirect impact of the Russia/Ukraine crisis on domestic inflationary pressures.

The 284th meeting of the MPC is scheduled to commence on Monday and end on Tuesday.

The analysts at Cordros Research said: “At a time when fresh headwinds have emerged over the health of the global economy and build-up in domestic inflationary pressures, the MPC is expected to hold its second meeting of the year on the 21st and 22nd of March 2022.

“We expect the Committee to examine the global economy’s health within the context of withdrawal of monetary stimulus by global central banks amid the ongoing spat between Russia and Ukraine.

“On the domestic front, short-term inflation expectations will likely discomfort committee members, particularly given the pass-through impact of elevated global energy prices on headline inflation.

“In our opinion, the Committee will likely lean towards an accommodative monetary policy stance predicated on the need to fully realise gains from previous policy actions geared towards boosting economic recovery.

“We do not expect the Committee to hike interest rates in response to the hawkish monetary policy currently adopted by global central banks.

“The domestic economy grew by 3.98per cent y/y in Q4-21 (Q3-21: 4.03 per cent y/y), bringing the full-year growth print to 3.40 per cent (2020FY: -1.92 per cent y/y) – reflecting that the economy has recouped all pandemic losses.

“Decomposing the breakdown, we highlight that the non-oil sector remains the engine of the overall growth. Precisely, the non-oil sector grew by 4.73 per cent y/y in Q4-21, albeit slower than the growth recorded in Q3-21 (5.44% y/y). For us, the growth reflects gains associated with the (1) seasonality effect in the agriculture sector, (2) sustained normalisation of economic activities, and (3) improved credit to the private sector.

“We expect the growth momentum to be sustained in 2022FY, albeit moderately, as the impact of the favourable base from the prior year dissipates.

“As a result, we project the economy would grow by 2.81 per cent y/y and 2.92 per cent y/y in Q1-22 and 2022FY, respectively. Accordingly, we expect the Committee to reiterate the need for CBN to maintain its current interventions to sustain the recovery of output growth, more so that the PMI readings remain sub-optimal. Therefore, we believe the preceding would induce the Committee to maintain its dovish stance, albeit with a hawkish tone.

“Although the headline inflation eased marginally in January, given the dissipating impact of festive-induced spending, it increased in February in line with the pass-through effect of higher energy prices on domestic prices.

“Specifically, the headline inflation increased by 10bps to 15.70 per cent y/y, primarily driven by the core basket (+14bps to 14.01 per cent y/y), which rose to the highest level since April 2017 (14.75% y/y), a fallout of increased utility prices following the surge in global energy prices.

“We expect the Committee to express concerns about the pass-through impact of the lingering Russia-Ukraine conflict on domestic prices, particularly as diesel prices continue to soar higher.

“Besides, the preparation for the 2022 planting season means that the gains from the 2021 harvest season would continue to wane, exacerbating demand-supply imbalances over the short term. Consequently, we believe the Committee will feel the need to maintain its monetary policy stance to allow its interventions to continue to support improvement in the aggregate food supply.

“We believe global central banks’ tightening of monetary policy will be a recurring discourse at this meeting, given that emerging and developing economies usually experience capital flow reversals as global financing conditions tighten. Nonetheless, we think concerns will be tethered by the modalities put in place by the CBN to minimise the exodus of FPIs from the economy.”