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Next CBN rate decision depends on food inflation

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Central Bank

Food inflation, which has reached an all-time high of 23.72%, is seen as a major factor in determining whether or not the Central Bank of Nigeria (CBN) will continue its aggressive tightening monetary policy in January 2023.

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Economic experts told BusinessDay that other factors to be considered are trade inflows and how other central banks react to their countries’ benchmark interest rates.

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Monetary Policy Committee

His assessment followed the fourth consecutive rate hike in November by the CBN. The Monetary Policy Committee raised the Monetary Policy Rate (MPR) by 100 basis points last month to 16.5 percent, bringing the cumulative increase in the reference interest rate this year to 500 basis points.

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Nigeria’s Q3 2022 business report, which was released on Monday, highlights the urgent need to increase revenue inflows amid declining business revenues. Nigeria generated 7.1 trillion naira in export revenue at the end of the first quarter, 7.4 trillion naira in the second quarter and 5.93 trillion naira in the third quarter.

In 2021, export earnings increased from 2.98 trillion naira in the first quarter to 5.02 trillion naira in the second quarter, followed by 5.14 trillion naira in the third quarter and 5.76 trillion naira in the fourth quarter.

CBN’s aggressive stance began in May 2022 when it raised the MPR to 13 percent from 11.5 percent. It further raised the key interest rate to 14 percent in July and 15.5 percent in September.

Godwin Emefiele

Godwin Emefiele, the CBN governor, attributed the recent rate hike to the need to improve the negative real interest rate, market sentiment and investor confidence.

He said: “Therefore, the MPC decided to continue tightening, but at a somewhat lower pace, noting that tightening the policy stance would reduce the negative real effective interest margin and thus improve market confidence and would further restore investor confidence.

“MPC also considered that recent developments in terms of the observed monthly slowdown in the rate of increase of inflation suggest that the previous tightening policies were giving the expected result. Therefore, he considered that maintaining the adjustment would further consolidate the decrease in inflation, although in a more significant way.

Emefiele added that the option to ease was not considered, as that would weaken the gains from past rate hikes.

National Bureau of Statistics

Headline inflation in Africa’s largest economy rose to a 17-year high of 21.09 percent in October from 20.77 percent in the previous month, according to the National Bureau of Statistics (NBS). Food inflation rose to 23.72 percent from 23.34 percent.

Staples such as rice, plantains, beans, fish and eggs have seen their prices rise steadily, according to NBS data. So far this year, the price of rice has risen by at least 20.18 percent, while bananas, fish, and eggs have risen on average by 24.08, 17.8, 16.3 and 32.9 percent, respectively.

Some economic analysts have said that even if the CBN were to raise the MPR in 2023, it would be at a slowing pace compared to this year’s rate hikes.

Capital Economics

Capital Economics, a London-based economic research firm, said in its November 2022 Africa Economic Report that as CBN acknowledges the monthly decline in inflation, there is a chance that rate hikes will stall in the future, although the upside risks are that strategic grain reserves would run out.

Also read: Emefiele forecasts inflation slowing to 15% by 2023

He pointed out that after five consecutive months of monthly increases of 1.8 percent, the headline inflation rate dropped to 1.4 percent per month in September and 1.3 percent per month in October.

Governor Godwin Emefiele

“Governor Godwin Emefiele was willing to argue that this shows that past moves to tighten monetary policy are paying off,” Capital Economics said.

“We suspect that policymakers are eager to end the tightening cycle. And further drops in the inflation rate on a month-to-month basis could provide the ammunition for MPC members to do so at the next meeting in January, just before the elections in February.”

Olaolu Boboye

Olaolu Boboye, a macroeconomist at CardinalStone, supported the position that declining month-over-month headline inflation has created room for a high or not too high rate hike in the future.

“It is very possible that CBN will continue with its aggressive stance for the next few months. However, the CBN’s position is released that the moderation in monthly inflation will provide some comfort in terms of the magnitude of the rate hike we could see next year,” Boboye said.

However, he cautioned that there are few upside risks from the negative transmission of climate change, which has caused flooding and affected food produced in Nigeria, as well as other supply-side factors. These are outside of CBN’s control and these factors will play an important role in CBN’s future rate decisions, she added.

However, analysts at CSL Stockbrokers disagreed, anchoring their position at the 500 basis point hike in the MPR this year alone.

“Having embarked on an aggressive MPR hike to a cumulative 500bp in 2022, we anticipate a hold in the first quarter of 2023 as inflation moderates largely due to the base effect. Furthermore, contrary to CBN’s opinion, we believe that the recent monthly moderation in inflation was largely driven by the relative stability in the cost of energy, particularly as the international price of crude oil remained below the $100,” they said in a statement to investors. .

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