CBN maintains its hawkish stance, prioritizing macroeconomic stability

As widely anticipated, the MPC unanimously voted to maintain its hawkish monetary stance during its third meeting of the year, raising the monetary policy rate by 150 basis points (bps) to 26.25%. The CBN consistently raised its monetary policy rate in the last three meetings, bringing the cumulative rate hike to 750bps. Notably, the committee opted to leave other policy parameters unchanged, including the asymmetric corridor at +100/-300 bps, Cash Reserve Ratio at 45%, and liquidity ratio at 30%.

The continued tight monetary policy stance reaffirms the CBN’s commitment to prioritizing macroeconomic stability, which is its primary mandate. However, it appears that the CBN is gradually applying brakes as the increase in the MPR is less aggressive compared to the previous two meetings, where it was raised by 400bps and 200bps respectively. This is largely due to the moderate uptick in inflation. In April, headline inflation rosebut at a slower pace to 33.69% from 33.2% in March, while month-on-month inflation decreased to 2.29% from 3.02% in March.

Beyond historical data, inflation expectations must be well-anchored for monetary policy effectiveness. The CBN Governor mentioned that the committee will continue to monitor global and domestic developments to ensure that inflation expectations remain well-anchored.

Additionally, the Central Bank highlighted recent volatility in the forex market, attributing it to seasonal demand and the interplay between demand and supply in the freely functioning market. The Naira experienced steady depreciation in May, reaching N1,540/$ before appreciating this week in anticipation of further monetary policy rate hikes.

CBN’s monetary tightening – Possible impacts on the economy, sectors and markets

The Monetary Policy Committee's (MPC) decision is poised to yield both intended and unintended outcomes across various facets of the Nigerian economy, sectors, and markets. On a positive note, we expect the moderate increase in inflation to persist with the possibility of disinflation in the second half of the year, bringing it close to the CBN’s 2024 forecast of 21.4%. We also expect the recent appreciation in the Naira to continue in the near term as foreign investors react positively to the CBN’s policy move, further easing inflationary pressures. However, the impending $1.3bn maturity suggests that a significant dollar outflow is imminent, which is likely to mount pressure on the currency. Despite these dynamics, the persistent increase in interest rates will act as a drag on economic growth, particularly affecting interest rate-sensitive sectors. Moreover, the banking sector, grappling with liquidity constraints, would remain hesitant about lending to the real sector. However, exchange rate-sensitive sectors stand to benefit from the anticipated appreciation in the Naira.

Policy Outlook

The next meeting of the Monetary Policy Committee (MPC) is slated for July 22nd and 23rd, with its decision expected to hinge on economic indicators and current market conditions. Inflation figures for both May and June will be accessible before the meeting and expectations are that inflation would be nearing its peak.