The forthcoming monetary policy meeting of the Central Bank of Nigeria’s Monetary Policy Committee (MPC) is anticipated to result in a 100 basis points elevation in the Monetary Policy Rate (MPR), indicating a potential increase in the interest rate.
Scheduled for the 20th and 21st of November, this meeting was deferred from September due to the appointment of the new CBN Governor. Since the previous MPC gathering in July, there has been a rapid transformation in the monetary policy landscape, primarily driven by regulatory adjustments implemented by the CBN, notably commencing from October.
If the reports hold true, a further rise in the interest rate by the MPC would convey a resolute stance in the apex bank’s battle against inflation, particularly in light of the increased near-term inflation expectations, which are poised to potentially peak at 28.02 per cent year-on-year in December.
It is widely believed that maintaining the MPR at current levels would not be aligned with the persistent surge in market interest rates. Hence, to harmonize with the recent hikes in market interest rates and considering that the MPR serves as a principal barometer for market interest rates and in the face of sustained inflationary pressures, it is anticipated that the Committee would lean towards a substantial MPR increment at its November policy meeting.
Significant modifications in the monetary sphere since the last MPC assembly include the removal of the maximum limit on the Standing Deposit Facility (SDF) and adjustments in the Open Market Operations (OMO) auctions.
In the subsequent sections, we will delve into these monetary policy measures implemented since the July policy meeting and how they are expected to translate into the Committee’s forthcoming decisions on the 21st of November.
Following an approximately eight-month hiatus, the CBN finally conducted OMO bills auction on 10th August. Despite the high subscription level in relation to the offer, the stop rates averaged 12.49 per cent across the 96-day (10.00%), 187-day (12.98%), and 362-day (14.49%) bills – notably surpassing the 8.50 percent mean level at the December 2022 auction.
Subsequent to this auction, there was no further activity until 30th October, when the CBN sold N400 billion, with the 365-day bill closing at 17.50 per cent (annualised: 21.20%). Two days later, the CBN auctioned another OMO bill worth N77.20 billion, with the stop rate averaging 15.36% across the three tenors and the 365-day bill concluding at 17.98 per cent (effective yield: 21.91%).
Despite the frequency of future OMO auctions, it is believed that they would serve the dual purpose of draining system liquidity and attracting Foreign Portfolio Investments (FPIs). As system liquidity diminishes due to repeated OMO auctions, local yields are expected to rise, rendering naira assets more appealing.
In terms of inflation, domestic price pressures have sustained an upward trajectory, ascending to 27.33 per cent as of October (compared to 24.08% year-on-year in July and 26.72% year-on-year in September). These pressures emanate from both the food segment, which saw an 88 basis points increase to 31.52% year-on-year, and the core segment, registering a 73 basis points upsurge to 22.58% year-on-year.
Additionally, currency pressures persist, with local participants being the primary drivers of the volumes in the Nigerian Autonomous Foreign Exchange Market (NAFEM) since the commencement of the year. Nevertheless, offshore investors are displaying growing interest, possibly due to the OMO auctions and an increasing optimism that the CBN has commenced fulfilling some of the outstanding FX forwards.
By John Doe, Media Talk Africa
