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CBN to raise interest rate, analysts predict

The Monetary Policy Committee of the Central Bank of Nigeria is expected to continue its hawkish stance in the face of ongoing inflationary pressures.

Following the 50-basis-point boost in September, which raised the Monetary Policy Rate to 27.25%, the MPC has frequently expressed worry about core inflation, excessive money supply growth, budget deficits, and rising food costs.

Despite a decline in headline inflation at the most recent MPC meeting, core inflation remained high, spurred by rising energy costs and structural problems.

The CBN Governor, Olayemi Cardoso, praised the Federal Government's efforts to combat insecurity in farming communities, underlining the necessity of continuing these actions to stabilize food supplies and pricing.

The Committee restated its determination to reduce inflation through appropriate monetary policy measures.

"The MPC also complimented the Federal Government's ongoing efforts to bridge the food supply imbalance through the duty-free import window for basic goods. The Committee also expressed confidence that lifting refined petroleum products from the Dangote refinery will reduce transportation costs and greatly alleviate food price pressures in the short to medium term.

"This is also expected to moderate foreign exchange demand for the importation of refined petroleum products, with a positive spillover on external reserves and an improvement in the overall balance of payment," the statement's first paragraph said.

With inflation reversing to an upward trend, observers expect the MPC to retain its aggressive policy.

Analysts at Afrinvest noted the MPC's problems, citing re-inflationary pressures in major global markets, increased domestic prices, poorer PMI data, and bureaucratic delays harming Dangote's PMS supply.

Concerns over a widening fiscal deficit and a sustained growth of the money supply (up 1.6% month-on-month to ₦109.0tn in September) complicate the MPC's policy decisions, indicating a continued hawkish posture.

The CBN's latest PMI report for October indicates a decrease to 49.6 points, down from 50.5 points in September. This signals a contraction in the corporate environment, following two months of consecutive expansion.

The composite PMI fell to 49.6 points in October, owing to uneven results in major sectors.

The Industry sector PMI fell further to 49.3 points from 49.7, while the Services sector PMI remained unchanged at 50.0 points.

Meanwhile, the Agriculture sector PMI slowed to 50.3 points from 51.4 in September.

"We observe that the fall in Industry PMI was fueled by weak performance in key variables such as New Orders (49.7), Employment (48.7), and Raw Material Stocks (49.2). According to the weekly report, Food, Beverage, and Tobacco products experienced the sharpest contraction among the 17 subsectors surveyed. This was due to a combination of households' declining purchasing power and negative exchange rate movement on production costs (NGN/USD lost 8% m/m to ₦1,671.32/USD at NAFEM window in October).

Analysts identified three important difficulties that the MPC will consider in its decision-making. These include dismal PMI statistics, rising inflation of 33.88%, a 2.2% month-on-month increase in oil prices, persisting foreign exchange volatility, and escalating budgetary constraints.

The national debt profile, which reached ₦134.3tn in H1 2024 (about 52% of GDP), may exceed ₦150.0tn by 2025 due to a projected ₦13.5tn deficit under the Medium-Term Expenditure Framework.

"Notwithstanding, the committee's consistent commitment on lowering inflation and attaining positive real interest rates to entice foreign investment suggests that another rate hike is on the way. Against this backdrop, we forecast at least a 25 basis point hike in the MPR at the year's last policy meeting next Tuesday," the analysts added.

In its macroeconomic report, Meristem Securities stated that significant global and domestic variables will likely dominate the committee's considerations.

"On a global scale, the reversal of disinflationary trends in advanced economies following rate cuts aimed at stimulating growth, the recent drop in oil prices, and the potential consequences of these developments for the domestic economy." Rising inflation in the domestic economy, together with increased fiscal spending and the continuous naira devaluation in both official and parallel markets, would have a significant impact on the committee's actions.

"These considerations are likely to impact the policy response, as the committee strives to balance price stability with the fiscal strains caused by increased public spending. Despite increasing fixed-income yields, investors continue to demand bigger returns, putting additional pressure on the monetary system.

"With headline inflation continuing to rise, we anticipate the MPC focusing on price stability and exchange control. The committee is likely to take a hawkish posture, raising interest rates to combat inflationary pressures, stabilize the naira, and maintain investor interest in Nigeria's fixed-income instruments, according to meristem securities experts.

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