There are signs that the Central Bank of Nigeria’s Monetary Policy Committee may raise its Monetary Policy Rate (interest rate) by 100 basis points this week.
According to The Punch, the MPC is scheduled to meet on November 20 and 21, having postponed its September policy meeting due to the appointment of the new CBN governor.
With the introduction of some orthodoxy by the CBN, especially since the beginning of October, the monetary policy landscape has drastically evolved since the last MPC meeting in July.
Further rate hikes by the MPC will send a strong message that the apex bank is not relenting in its fight against inflation, especially given that near-term inflation expectations are tilted to the upside and could potentially reach a 28.02 percent y/y peak in December, according to a report released by Cordros Capital on Friday.
”Furthermore, we believe that the market interest rate will not continue to rise at the same pace if the MPR is kept at its current levels.
”The Committee will therefore probably support a further increase in the MPR in order to (1) ensure that the MPR continues to be the primary signaling instrument for market interest rates and (2) maintain inflationary pressures in line with the recent increases in market interest rates.
Since the last MPC meeting, two major developments have occurred in the financial sector: (1) the removal of the Standing Deposit Facility maximum limit, and (2) the introduction of OMO auctions. The monetary policy measures implemented since the July policy meeting are covered in the paragraphs that follow, together with how they affect our expectations for the Committee’s meeting on November 21.
The CBN finally held an auction of OMO bills on August 10th, following a lapse of almost eight months. The stop rates averaged 12.49 percent for the 96-day (10.00%), 187-day (12.98%), and 362-day (14.49%) bills, despite the high subscription level compared to the offer (Bid-offer ratio: 2.1x). This is significantly higher than the 8.50 percent mean level at the December 2022 auction.
The CBN did not hold another auction until October 30th, though, at which point it sold N400 billion, with the 365-day bill closing at 17.50 percent (annualized: 21.20 percent).
Two days later, the CBN held another OMO bill auction, selling instruments valued at N77.20 billion. The three tenors’ average stop rate was 15.36%, while the 365-day bill closed at 17.98% (effective yield: 21.91%). Regardless of how often the OMO auctions are held in the future, we believe the two main goals are to (1) recruit FPIs and (2) mop up system liquidity. On (1), local rates will rise, making naira assets more appealing, as system liquidity dries up due to the regular OMO auctions.
In terms of inflation, pressures on domestic prices continued to rise, ending the month of October at 27.33 percent (compared to July’s 24.08% y/y and September’s 26.72% y/y). These pressures came from the food (+88bps to 31.52% y/y) and core (+73bps to 22.58% y/y) baskets.
In other places, currency pressures are still there, and since the start of the year, local players have been the main forces behind the volumes in the Nigerian Autonomous Foreign Exchange Market. The OMO auctions and mounting hope that the CBN has begun to deliver some of the outstanding FX forwards, however, appear to be piqueing the interest of offshore investors.
