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Nigeria's CBN Governor, Godwin Emiefele

CBN’s Recent”Big” 100bps Rate Hike

The Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC), on Tuesday, concluded its last meeting for 2022. In line with our expectations, the committee increased the monetary policy rate (MPR) by 100bps from 15.5% to 16.50%, representing a fourth consecutive rate hike since May 2022.
Cumulatively, the benchmark interest rate increased by 500bps this year alone. Thus, the Committee voted unanimously to raise the MPR, while leaving other parameters constant, with nine (9) members voting for 100bps and the remaining two members opting for a 50bps rate hike. The Cash Reserve Ratio (CRR), Asymmetric corridor, and liquidity ratio were left unchanged at 32.50%, +100/-700 basis points around the MPR, and 30.0%, respectively.

The decision of the Committee was on the back of the need to combat elevated inflation, moderate negative real interest rate margin, and strengthen investor confidence according to the Governor of the apex bank, Godwin Emiefele. The Committee felt the outcome of the previous tightening policies yielded the expected result as the month-on-month inflation rate moderated for three consecutive months from 1.82% in Jul ’22 to 1.24% in Oct ’22. The October inflation rate printed at 21.09%, ceases to abate as y/y inflation sustained an uptrend by rising for nine consecutive months. Y/Y inflation is currently at an all-time high since September 2005 due to a rise in the food and core sub-indices to 23.72% and 17.76% in October 2022 from 17.60% and 23.34% in September 2022. The food and core sub-indices were exacerbated by severe flooding in the country’s food-producing regions, exchange rate pressures, and persistent fuel scarcity.

For context, between the last MPC meeting held in September 2022, and the recent November 21st & 22nd, 2022 meeting of the committee, the price of Brent crude remained elevated, trading between $80- $100 p/b throughout the period. Despite the elevated oil prices, external reserves dipped further by $1.2 billion from $38.36 billion on September 27st, 2022, to $37.19 billion on November 21st, 2022.

Similarly, the Naira exchange rate against the dollar in the I&E window FX window depreciated by 205bps from $1/₦436.33 to $1/₦445.50 and 756bps from $/₦721 to $/₦780, respectively, within the same period as the apex bank continues to tap into the nation’s buffer to support the Naira. Data from CBN revealed that the Broad money supply (M3) increased significantly by 13.80% in October 2022 compared with 11.00% in September 2022, driven by claims on ‘other sectors’ (other financial corporations, public non-financial corporations, and private sector).

The Committee’s decision to raise the MPR to rein in inflationary pressures and reduce capital outflows from the economy has largely been influenced by the hawkish stance of both developed and emerging markets. While the rate hike would help curtail the increasing money supply, it is pertinent to note that external factors and other structural constraints drove the rising inflationary pressures recorded in the previous months, which rate hikes may not effectively address.

The m/m moderation in inflation, if sustained, would likely determine if the MPC would hold or hike the rate further in the nearest future. However, monetary policy decisions by global central banks will remain a critical focus point for the Committee and could influence the decision of the Committee in the next meeting. In line with our expectations, we expect yields across maturities to rise with the rate hike for the fixed-income market. Also, for the equities market, we expect bearish sentiments to persist as investors seek to take advantage of higher yields in the fixed-income market.