MPC tightens further, raises the MPR by 50 bps to 27.25%

At its penultimate meeting in 2024, the Monetary Policy Committee (MPC) increased the monetary policy rate by 50 basis points (bps) to 27.25%. Notably, 11 of the 12 members were present, and the decision to tighten monetary policy was unanimous. This marks the fifth consecutive rate hike this year, bringing the cumulative rate hikes to 850 basis points. However, this decision surprised many analysts, who expected the committee to maintain the current rate.

While the MPC acknowledged a two-month decline in inflation—primarily driven by food prices—and noted the relative stability of the exchange rate across different market segments, it expressed concerns about rising core inflation due to increased energy costs. The committee also highlighted heightened risks to food inflation from factors such as flooding, insecurity, and rising logistics costs. Furthermore, the growth in money supply linked to FAAC allocations and its impact on the exchange rate was noted. However, the Central Bank of Nigeria (CBN) remains hopeful that the Dangote refinery will alleviate forex demand pressures and positively affect gross external reserves.

Additionally, the committee raised the Cash Reserve Ratio for Deposit Money Banks (DMBs) by 500 bps to 50%, while increasing the ratio for Merchant Banks by 200 bps to 16%. The liquidity ratio remains unchanged at 30%, and the asymmetric corridor around the MPR was retained at +500/-100 bps.

Implications

The CBN's continued interest rate hikes reflect its dedication to maintaining price and exchange rate stability. Raising the MPR while other global economies lower their interest rates is likely to attract foreign portfolio investments into Nigeria, enhancing forex inflows and alleviating currency pressures. However, for portfolio investors to be drawn in, the MPR must effectively anchor all other rates. That is, the treasury bill yields, which have declined in the last four auctions must reflect the further hike in interest rates, consistent with the CBN's orthodox monetary policy. If this occurs, the cost of government debt may rise significantly, straining public finances. Additionally, it could crowd out the private sector, hindering business expansion and profitability, which would subsequently impact GDP growth in the upcoming quarters. Recent Q2 GDP figures revealed that the services sector drove growth, while many productive sectors either slowed or contracted. The sub-optimal growth in the real sector would exacerbate unemployment levels.

An increase in yields in the fixed-income market also suggests that the equities market could be bearish in the near term. Additionally, the increase in the Cash Reserve Ratio (CRR) will further pressure the banking system, which is already experiencing a liquidity squeeze. Although the CBN has linked the rise in money supply to FAAC allocations and their effects on the exchange rate, this decision is likely to exacerbate the challenges faced by banks, limiting their ability to expand credit to the private sector. Notably, the opening positions of banks have been in the negative territory since early September, indicating significant liquidity issues. To alleviate the financial strain on the private sector, efforts to mitigate the impact of FAAC disbursements should focus specifically on the public sector.