Nigeria's Monetary Policy Committee Faces Inflationary Pressure Amid Economic Volatility

Nigeria's Monetary Policy Committee says it expects higher inflationary pressures in the short term driven by risks such as rising fuel prices, flooding and exchange rate volatility. Abdulazeez Kuranga, Regional Economist, West Africa Standard Bank Group, joins me to unpack the policy decisions taken yesterday by the MPC. Thank you Abdulazeez, pleasure to have you on the show today. Thank you for having me. Now we had a panel here yesterday talk about of course the outcome of that meeting and one thing we all agreed on was that expectations, the outcome did not align with expectations. Everyone was expecting a hold. But let's start with your expectations and what you made of that announcement. We were also expecting a hold at that meeting yesterday and our expectations were hinged on two key factors. The first is that headline inflation are moderating for two consecutive months and despite the expectations that inflation should be increasing in the near term. We're expecting that inflation will not be touching the 34.19% year peak that we saw in June. So that should be supportive of a hold decision. And aside that there was also a body language from the CBN from 26th of August when we had the SDF, SLF in such a way that now banks can only place a maximum amount of 3 billion Naira on an overnight basis with the CBN to end the prevailing rate as of then of 25.75% and any amount greater than that would be remunerated at 19%. So that means that the opportunity cost for depositing money with the CBN would just be to buy bills. So as a result of that we saw a rally in bills. So that's sort of like, to the minds of our market players, sort of like brings into consideration of a do-we-stands in a tight monetary environment. So if that is the case, you then look at it as okay, if this is what they are trying to do and because the economy or the structural factors was not really aligned with the rate cut at that meeting, then probably the optimal option at the meeting would be to just hold the policy. So those two key factors informed our expectations of the rate cut. But did you think a 50 basis point hike was a little aggressive? And thinking about the rationale behind that, the CBN said look, we're still very concerned about inflation, especially core inflation. It's not aggressive. They are already looking at positive returns, right? So you see 50 basis points. So we just see that as a restatement or an emphasis from the CBN that look, markets, we are still resolute on our stance on fighting inflationary pressure. So don't even think of it and that we are going to do a do-we-stand. So aside that, they also view that and this is also likely a sort of trying to stay ahead of the curve in terms of you expecting that inflation will be increasing in the near term. So just stay ahead of that, then you hike by 50 basis points. So it's not aggressive in our view. And still on the issue of inflation, we're still somewhere at around just over 32%. Now we obviously had that sudden increase in the price of petrol and I suppose the CBN is waiting for that to kick in in the next inflation data. But talk to us about, I mean, because some analysts have been looked, have said the CBN needs to re-anchor its inflation and exchange rate expectations going forward with what we're seeing with the pump price increase. But talk to us about your inflation expectations. What kind of jump should we expect at the next print? When can we expect it to begin to taper down again like we saw in the last two months? For us, you first of all look at transport. The transport CPI is about 12.7% of core inflation and about 6.5% of the overall lead line inflation. Where we're coming from, last year we saw about 2.76X increase in fuel prices and also FX unification. Both of them led to significant increases then. But right now we're seeing between 35-50% increase in PMS prices. So that jump that we're expecting may not be much. So however, there are also other key constraints or key factors that should also be driving higher prices. First would be the flooding issues that we are seeing. So that is likely to just cap the expectations around the harvest season so far this year. And that also combining with the direct and indirect impact of fuel prices on transport costs and food prices. So we're expecting that by September we should be seeing deadline inflation settling at about 34% and 32.4-32.5% from the current 32.15%. So we're still expecting another increase by October but by November we're expecting a slight modulation likely driven by the large base effects from the prior year. So from our expectations and our in-house forecast we're expecting that deadline inflation should be ending the year at about 32% by year end. We're not seeing deadline inflation breaching 30% until February 2025. And also we call that the CBN as an inflation target of 21.4%. So this PMS price increase in our view will be setting the CBN aback by about 8 months. There's also wage increase that we're expecting and potential even increase in electricity tariffs. That's also under the table. So those are also likely factors that will not take us about until based on our current estimates until February 2026 and before we see inflation touching that target. So because deadline inflation is likely to be below the current NPR rates by mid-2025 and we're still factoring in that the default interest rates will likely come by then. Other than that, once the November policy meeting kicks in we're expecting further increase based on the tone or based on the policy language that we've seen. So is it a slight increase just as aggressive, 25 basis points, 50? Between 50 to 100 basis points increase. Then after which we're likely to just see them on the market. Because the MPC seems to have developed a habit of not going in the opposite direction of market expectations and forecast. This is like the first time the MPC is going against our market expectations in terms of free tax. From February, where you expect 300, 400, you do 400, you expect 200, you do the 200, you expect 150, you do the 150. So this is just really like the first time that the actions are against market expectations. Okay, 850. And for the deposit money banks, cash reserve ratio going up by 50, 500 basis points to 50% from 45%. Talk to us about market impact. He still expressed confidence in the banking industry, according to the CBN government, still strong, still resilient. But of course we know we need to get to that $1 trillion economy as soon as possible. But talk to us about what you thought was going on in his mind. If you look at the latest statistical bulletin of the CBN, as of March 2024, total deposits in the banking system, in local currency, the local currency deposits are about $46 trillion, spread between $25 trillion in other deposits and $21 trillion in transferable deposits. So if you just go that between then and now, and assume probably it has increased by 5%, 10% to about $56 trillion. So you take that 5% on that deposit, so you should be getting around $2.8 trillion additional from the system. So we don't really expect them to just take this at once. So it will likely be a gradual approach from the rest of the year. So if that is the case, you are just likely going to see less and more issuances. Do you think that for the monetary authorities, they have done what, maybe it's a strong word, the very best they can on the monetary side. And I know he did allude to that in some of his comments. When he mentioned things like that he noticed that there's a spike in liquidity and pressure on exchange rate when funds are released from the Federal Accounts and Allocation Committee. And of course there's still pressure on food insecurity, etc. Obviously those are not things that the monetary authorities have control over. They can only of course exchange rate and price stability. That's their core mandate. But that call, again, to the fiscal authorities to help fix structural issues, to do their part as it were. Talk to us about that, how the fiscal authorities are interpreting the outcome of this meeting. So it has always been an issue with Nigeria. So at least so far, since Cardoso came into the system, he has tried as much as possible to introduce orthodoxy in the system. So in our view, we think they are really in line and going the way they should be in terms of the monetary policies. So we are happy and more still needs to be done. And that complementary actions with the fiscal authorities is also still needed because monetary policy alone cannot do this. So you need, which he also mentioned yesterday, so you need that supportive actions from the fiscal authorities. And speaking about support, he also did talk about the exchange rate. Now for those who are still thinking that the Naira, I mean obviously that's the aim, to strengthen the Naira, to support the Naira as much as possible. But he did also provide a caveat that look, we're still a monolithic economy. Non-oil exports are nowhere they ought to be. So we shouldn't expect magic, if you will, lack of a better word, in terms of the Naira strengthening. But we have seen the Naira at a somewhat predictable band of 1,550 to 1,650. Is that what we can expect in the short to medium term? Still ranging around that area because so far you have seen the DCBN coming into the market. For September alone, we've seen them about four to five times coming into the market. So just so as to support the currency. So we're expecting that to be maintained, especially as we are seeing improvements in inflows, driven by all these one-off factors. I thought that with that improvement in the inflows, he would, but I guess the fundamentals are the fundamentals at the end of the day. If the fundamentals are not there, then it's still an issue, even if inflows are increasing on a monthly basis. But are you bullish on the currency? I mean, the economy as a whole, in terms of light at the end of the tunnel, what's the policies and impact of the reforms? So to take that, probably I'll just need to take us back to some of these rating actions that I was saying. So far, the three key rating agencies, they've maintained the ratings at current levels, but outlook has been positive. And that is all these reforms being maintained. So we think if this continues, so pressures are only likely in the near term, then over the medium term. So you tend to see an improvement. So for instance, is this an inflationary pressure? You can see so far, as you are moving further into the following year, so far the pressures continue to subside. You know, you calculate airline inflation on a year-on-year basis. So you always see this inflation, the same period, the following year. All right, Abdullaziz, we're going to have to leave it there. But thank you so much for sharing your perspective with us today. We appreciate your time on the show. Abdullaziz Karanga, Regional Economist, West Africa Standard Bank Group, unpacking the decision of Nigeria's Monetary Policy Committee yesterday.

Nigeria’s Monetary Policy Committee says it expects higher inflationary pressures in the short term driven by risks such as rising fuel prices, flooding and exchange rate volatility. Abdulazeez Kuranga, an Economist at Stanbic IBTC Bank, joins me for this discussion.

CBN expects more inflationary pressure

Nigeria’s Monetary Policy Committee says it expects higher inflationary pressures in the short term driven by risks such as rising fuel prices, flooding and exchange rate volatility. 

CBN expects more inflationary pressure

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