There are indications that the Monetary Policy Committee of the Central Bank of Nigeria will further hike its Monetary Policy Rate (interest rate) by 100 basis points this week.
The MPC is expected to meet on the 20th and 21st of November after failing to have its September policy meeting, following the appointment of the new CBN Governor.
Since the last MPC meeting in July, the monetary policy space has changed rapidly, given some orthodoxy introduced by the CBN, particularly since the beginning of October.
A report published by Cordros Capital on Friday, and made available to The PUNCH, hinted that ‘’further rate hikes by the MPC will send a strong message that the apex bank is not relenting in its inflation fight, particularly as near-term inflation expectations are tilted to the upside, potentially reaching a 28.02 per cent y/y peak in December.’’
‘’Besides, we think that maintaining the MPR at current levels will not be synchronous with the lingering increase in the market interest rates.
‘’Thus, to align with the recent market interest rate increases, the Committee will likely favour a further increase in the MPR more so that the (1) MPR remains the key signalling tool for market interest rates and (2) inflationary pressures have remained intact.
Consequently, we expect the MPC to increase the MPR by at least 100bps at its November policy meeting,’’ the report noted.
The significant changes that have taken place in the monetary space since the last time the MPC met include: (1) removing the maximum limit on the Standing Deposit Facility (SDF) and (2) OMO auctions. In the following paragraphs, we discuss these monetary policy measures since the July policy meeting and their feed through into our expectations when the Committee meets on 21st November.
After about eight months of hiatus, the CBN eventually auctioned OMO bills on 10th August. Despite the high subscription level relative to the offer (Bid-offer ratio: 2.1x), the stop rates averaged 12.49 per cent across the 96-day (10.00%), 187-day (12.98%), and 362-day (14.49%) bills – exceptionally higher than 8.50 percent mean level at the December 2022 auction.
However, after this auction, the CBN did not conduct another one until 30th October, where it sold N400bn, with the 365-day bill closing at 17.50 per cent (annualised: 21.20%).
The CBN auctioned another OMO bill two days later, selling instruments worth N77.20bn. The stop rate averaged 15.36% across the three tenors, with the 365-day bill closing at 17.98 per cent (effective yield: 21.91%). Irrespective of how frequent the OMO auctions become going forward, we think the aim is to serve dual functions of (1) mopping up system liquidity and (2) attracting FPIs. On (1), as system liquidity dries up because of the frequent OMO auctions, local yields will increase, making naira assets more attractive.
On inflation, domestic price pressures sustained their uptrend, settling higher at 27.33 per cent as of October (vs July: 24.08% y/y | September: 26.72% y/y), with pressures stemming from both the food (+88bps to 31.52% y/y) and core (+73bps to 22.58% y/y) baskets.
Elsewhere, currency pressures remain intact, with local players remaining the key drivers of the volumes in the Nigerian Autonomous Foreign Exchange Market (NAFEM) since the beginning of the year. However, we understand that offshore investors are beginning to show some interest, possibly due to the OMO auctions and growing optimism that the CBN has started to deliver some of the outstanding FX forwards.
