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CBN likely to retain rates during next week’s MPC meeting

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The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) is expected to hold its third meeting of the year on the 23rd and 24th of May next week. As in the past meetings this year, the Committee remains faced with either maintaining its hiking cycle or keeping policy parameters unchanged. We expect the Committee to remain resolute on the path of smaller rate hikes, after taking the global and domestic events since its last policy meeting into account, more so that the CBN governor already hinted at such a path at the last policy meeting held in March. On the global scene, systemic central banks are signalling a peak in their interest rate hiking cycles although they are leaving the door open for more tightening if conditions warrant. In the domestic economy, headline inflation maintained its upward trajectory, currency pressures remain intact and there are signs the real GDP growth eased in Q1-23 primarily due to the CBN’s naira redesign drive. Overall, we expect the Committee to increase the MPR by 50bps and retain other policy parameters.


Local Economy Expected to Remain on a Growth Path, Albeit Slowly

Q1-23 was characterized by a significant cash crunch induced by the CBN’s naira redesign drive amid increased production costs. This is reflective of the impact of the policy on the informal sector, which according to the National Bureau of Statistics (NBS), constitutes 41.4% of GDP as of 2015 – World Bank estimate: 48.2% (as of 2018). Consequently, the non-oil sector’s growth is likely to have slowed significantly in Q1-23 with the agriculture, trade, real estate and arts & entertainment subsectors expected to have borne the brunt. Meanwhile, crude oil production (including condensates) averaged 1.52 mb/d in Q1-23 (Q4-22: 1.35mb/d), suggesting that the oil sector likely grew by 2.01% y/y in Q1-23, albeit not enough to lift the overall growth prospect in the review period. On a balance of factors, we forecast the domestic economy likely grew by 1.89% y/y in Q1-23, lower than the 3.52% y/y and 3.11% y/y growth recorded in Q4-22 and Q1-22, respectively.

Based on the preceding, and barring any major shocks to the economy, we forecast real GDP to grow by 2.77% y/y in 2023E (2022FY: 3.10% y/y). Overall, we expect the Committee to remain cautiously optimistic that domestic growth will stay on a growth path, albeit at a subdued pace. Hence, the Committee is likely to highlight the need to strengthen output expansion and forestall the reversal of gains recorded so far by slowing down on the pace of rate hikes and maintaining the ongoing monetary and fiscal interventions in critical growth-enhancing sectors.


Inflationary Pressures Likely to Remain Sticky in the Near Term

Consumer prices maintained their uptrend, rising by 18bps to 22.22% y/y in April (March: 22.04% y/y). We attribute the price increases to the festive-induced demand and the passthrough impact of higher transport costs in the review period. Accordingly, the breakdown provided showed that food prices rose further by 16bps to 24.61% y/y while the core inflation (+28bps to 20.14% y/y) remained at its highest level since May 2004 (23.43% y/y).

Consequently, analysts at Cordros Capital expect the MPC to remain concerned about the persistent inflationary pressures, likely attributing it to supply shocks and the one-off elevated demand witnessed in the review month. Overall, the Committee is likely to express further concerns on upward risks to inflationary pressures in the near term, including the prospect of subsidy removal. Nonetheless, we expect members to urge the fiscal authority to sustain its real sector interventions and take decisive steps in tackling the contributory legacy factors limiting food production and distribution in the country.

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