Analysts predict increase in MPR by 50bps

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A group of analysts at Cordros Securities on Thursday predicted an increase in Monetary Policy Rate (MPR) or interest rate by 50 basis points by the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN).

The MPC of the CBN is expected to hold its second meeting of the year on the 20th and 21st of March 2023.

During the first meeting, MPC members voted to increase MPR to 17.5 per cent from 16.5 per cent; retain the asymmetric corridor of +100/-700 basis points around the MPR; retain the CRR at 32.5 per cent; and retain the Liquidity Ratio at 30 per cent.  

At the first meeting, inflation rate was at 21.82 per cent in January from 21.91per cent the national Bureau of Statistics (NBS) reported in February 2023.

Analysts at Cordros Securities said: “At the last policy meeting held in January, more members voted for a 50bps increase in the MPR compared to the voting pattern since the interest rate hiking cycle began in May 2022.

“Also, a glance through the personal statements of the MPC members showed that the CBN Governor was among the four members that favoured a 50bps hike at the last policy meeting. The key reasons granted by members in favour of a 50bps increase at the last policy meeting include (1) cautious action that returns inflation within tolerable levels and minimises output loss and (2) the need to balance the risks of under-and-over-monetary tightening.

“We align with the views of members that favour moderate tightening given that inflationary pressures are expected to remain sticky over the short term while the risks to domestic growth have increased relative to the prior meeting. In addition, global central banks’ tone suggests that they are gradually approaching the end of the interest rate hiking cycle although they cannot rule out the possibility of further smaller rate hikes than market expectations.

“Consequently, we think the MPC is now at a crossroads of navigating between the Scylla of pausing as risks of overtightening emerge and the Charybdis of hiking too much and watching the economy fall off a cliff. Perhaps, an optimal choice at this time is to guard against complacency about the domestic economy’s ability to bend without breaking and remain sensitive to data.

“Consequently, we lean towards a smaller hike, similar to the actions of central banks of developed economies. Accordingly, we expect the Committee to increase the MPR by 50bps and retain other policy parameters.”

They noted that the persistent increase in price pressures primarily reflects the intermittent PMS scarcity and the associated fuel price increases and low food supply exacerbated by restricted access to fertilizer and high conflict incidences.

“Overall, in February, food prices rose by 3bps to 24.35per cent y/y while the core inflation moderated by 32basis points to 18.84per cent y/y.

“Consequently, we expect the MPC to express concerns about the persistent inflationary pressures, likely attributing it to supply shocks worsened by the PMS scarcity, and electricity tariff increases amid spending relating to the 2023 general elections.

“While we envisage the Committee to express a positive outlook on prices as electioneering activities wind down, we expect members to urge the fiscal authority to sustain its real sector interventions and take decisive steps in tackling the contributory legacy factors limiting food production and distribution in the country,” they added.

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