CBN may increase interest rate to reflect current economic realities – As members of Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) begin their two-day meeting today, market pundits at Cordros Group said the apex bank might hike the benchmark interest rate to reflect the subtle improvement in the macroeconomic environment.
Analysts at Cordros Group said while voting among the MPC members would be divergent as usual, most members would vote for increase in the benchmark Monetary Policy rate (MPR) from 11.50 per cent.
“Our baseline expectation is that most members will vote for a 50 basis points hike in MPR. However, we do not rule out the possibility of a 100 basis points hike, particularly if the first quarter 2021 Gross Domestic Product (GDP) numbers surprise positively,” Cordros Group said.
According to analysts, the third MPC meeting comes at a time of fascinating developments in the domestic and external economy as inflationary pressures cooled down in Nigeria in April despite lingering supply-side challenges while risks to global economic growth remain roughly balanced despite emerging bumps that could undermine reflation trade and the commodity supercycle.
Analysts noted that activities in the domestic economy started the year on a dull note given the resurgence in COVID-19 infection rates across the country, but since then, economic activities have improved, although slowly.
Economic resurgence was supported by the continued reopening of the economy amid the citizens’ adaptation to changes brought by the pandemic, optimism surrounding the administration of COVID-19 vaccines and reeling impact of government support, particularly to the agricultural sector.
The manufacturing PMI improved by 3.8 points to 48.7 points in February 2021 from 44.9 points in January 2021 while the non-manufacturing PMI jumped by 5.4 points to 48.7 points during the same period.
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Analysts noted that given that there was no major shock to the economy in March, the manufacturing and non-manufacturing PMI would have increased above the 50-points benchmark.
“Overall, we forecast a GDP growth rate of 0.94 per cent in first quarter 2021 from 0.11 per cent in fourth quarter 2020 driven mainly by the non-oil sector. Accordingly, we believe sustained expansion in economic activities would bring comfort to the Committee that the economy has consolidated on the tepid recovery in fourth quarter 2020, averting a W-shaped recovery,” Cordros Group stated.
The report pointed out that contrary to market expectations, domestic prices experienced disinflation for the first time since August 2019, when the Federal Government ordered the closure of the land borders. The headline inflation moderated by five basis points to 18.12 per cent in April 2021, primarily driven by the slower rise in food prices amidst a third consecutive month of decline in the core inflation.
Cordros Group stated that the moderation in inflation in April would likely spark a debate on whether it is transitory or a trend that will persist in the coming months, noting that its opinion is that the magnitude of the decline is too marginal to bring comfort to the Committee that the economy is beginning to experience disinflation. In addition, the headline inflation is still materially above the upper band of the CBN’s medium-term target of between 6.00 per cent and 9.00 per cent.
“Moreover, we believe members will be wary of the following risks that could potentially worsen inflationary pressures; repercussions of the persistent security challenges on the harvest season, the growing prospect of the removal of fuel subsidy and possibility of an upward adjustment in electricity tariffs,” Cordros Group stated.
The report outlined that while sustained vaccination efforts and reopening of economies have kept hopes of reflation trade intact, accelerating inflation in the United States has prompted fears that the Fed might tighten monetary policy earlier than expected if prices continue rising.
Analysts however pointed out that the Fed has tried to allayed market concerns, noting that monetary policy will remain broadly accommodative until it sees “substantial progress” consistent with its full employment and price stability goals.
Cordros Group aligned with Fed officials given the idiosyncratic factors such as pent-up consumer demand arising from the reopening of the economy and fiscal stimulus, shortage of chips affecting the price of used vehicles and high gasoline prices driving inflationary pressures.
“Consequently, we believe the Committee will have little worries about the possibility of capital flow reversals that will amplify exchange rate pressures at this meeting,”” Cordros Group stated.
