CBN to raise benchmark interest rate at next meeting – FDC

THE Central Bank of Nigeria (CBN) is expected to raise the benchmark interest rate in its monetary policy committee (MPC) meeting scheduled to be held on March 25 and 26, according to the Financial Derivatives Company Limited (FDC), a finance and research firm.

In its ‘Economic Splash February Inflation’ report, the FDC said the CBN committee members would be in a dilemma, whether to tighten further or maintain the status quo.

“The most likely outcome is a 100-basis point increase in the MPR to 23.75 per cent p.a. The real challenge will be the lag between the rate increase and the moderation in the headline inflation whilst attempting to achieve macroeconomic stability.”

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The National Bureau of Statistics (NBS) released the February inflation data on Friday, March 15, disclosing that headline inflation rose by 2.51 per cent to 31.70 per cent from 29.9 per cent in January, The ICIR reported.

The FDC stated that the 28-year high inflation is making policymakers scratch their heads.

Food inflation, in particular, climbed by 1.8 per cent to 37.92 per cent, driven by sharp increases in prices of rice (35.7 per cent), beans (17.6 per cent), tomatoes (40 per cent), eggs (18.4 per cent), Turkey (25 per cent), and others commodities.

Core inflation (which excludes food and energy) rose by 1.54 per cent to 25.13 per cent, suggesting structural inflationary pressures are persistent.

To tame inflation, FDC said, “The situation calls for a comprehensive change of strategy in the use of monetary and fiscal measures to address inflationary trends effectively.”

Cost-push factors, weaker naira, and foreign exchange translation costs in replenishing inventory are contributing factors.

Nigeria’s economy faces cost-push inflation, which occurs when there is a decrease in aggregate supply (i.e., the total amount of goods and services that the economy can produce) due to an increase in the cost of production.

It is propelled when, in a bid to retain their profit margins, manufacturers increase the prices of their goods and services as production cost goes up, affecting the cost of some variable factors of production like labour and raw materials increases, The ICIR can report.

At its first MPC for the year, the apex bank raised the benchmark interest rate by 400 basis points to 22.75 per cent from 18.75 per cent, The ICIR reported

The committee adjusted the asymmetric corridor from +100 to -700 from the previous +100 to -300 basis points. Also, it raised the cash reserve ratio to 45.00 per cent from 32.50 per cent and left the liquidity ratio at 30 per cent.

We expect that the inflationary trends increase will continue in March due to the demand push effect of Ramadan and Easter.

Inflation to remain high in 2024

Inflation is expected to remain unabated for most of the year despite CBN’s continued contractionary monetary policy stance.

“The continued uptick in inflationary pressures is expected to stay elevated for most part of the year even as the country reels from the impact of insecurity challenges on food supply chain,” analysts at Cowry Asset Management said in their weekly report.

“They said the issue would be further compounded by the increase in electricity tariffs, stamp duties, removal of subsidy on petrol and the upward exchange rates adjustment by the CBN to ease the pressure on the foreign exchange market.



    “Looking ahead, we expect the underlying drivers of inflation to continue exerting upward pressure on components of Nigeria’s inflation basket. As such, we anticipate the Nigeria’s headline inflation will continue its upward trend to 34 per cent in March 2024 following the pass-through effect of the naira devaluation and rising cost of living,” the Cowry analysts added.

    Also, analysts at CardinalStone Finance, an investment house, stated in their market review that the rising inflation pressure indicates that Nigeria remains within the top 10 countries with the highest inflation reading in Africa.

    “A material jump in prices of foodstuff like rice was a consequence of the increasing depletion of food reserves and incessant insecurity issues in food-producing parts of the country,” the CardinalStone analysts said.

    In an interview with Channels Television’s Sunrise Daily in January, the FDC chief executive officer and foremost economist, Bismarck Rewane, said the MPC must meet more than four times yearly to stem rising inflation.

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