The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) is set to convene for the final meeting of the year on 25 and 26 November. Since the last meeting in September, inflation has taken a sharp turn upward, rising for two consecutive months due to the pronounced effects of the PMS price surge and recent flooding in food-producing areas. With inflation risks firmly skewed to the upside, we expect the MPC to implement another rate hike to (1) reaffirm their commitment to price stability, (2) anchor inflation expectations, and (3) achieve positive real returns. This comes even as global economies pivot towards a more accommodative stance. Our expectation is a 50bps increase in the Monetary Policy Rate (MPR) to 27.75%, with all other parameters left unchanged.
Stronger PMI Highlights Resilient Economic Activity in Q3-24
Based on the CBN’s Purchasing Manager’s Index (PMI) survey report, the Composite PMI surpassed the 50.0 points threshold in Q3-24, averaging 50.13 points in Q3-24 from an average of 48.0 points in Q2-24, indicating still resilient economic activities in the non-oil sector amid persistent headwinds. Specifically, economic activities expanded in August (50.2 points vs. July: 49.7 points) for the first time since June 2023 and remained in the expansion territory in September (50.5 points). Activities improved in the services (50.7 points vs Q2-24: 48.1 points) and agricultural (50.5 points vs Q2-24: 49.4 points) sectors, while the industry sector (49.1 points vs Q2-24: 47.17 points) remained in the contractionary territory, reflecting the combined impact of subdued consumer demand, tight financial conditions, and sustained inflationary pressures.
Nonetheless, we project the non-oil sector to grow by 2.64% y/y in Q3-24 (Q2-24: 2.80% y/y | 2.75% y/y), indicating slower growth momentum in the agricultural and services sectors. For the oil sector, we anticipate strong growth in Q3-24 following the significant improvement in domestic oil production (1.55mb/d vs Q2-24: 1.47mb/d | Q3-23: 1.43 mb/d) driven by improved security measures and growth in oil produced from the new oil stream (Utapate). Nonetheless, given a high base from the corresponding period in the previous year, we expect oil sector growth to slow to 6.90% y/y (Q2-24: 10.15% y/y). Overall, we anticipate that the GDP will grow by 2.90% y/y in Q3-24 (Q2-24: 3.19%. y/y). We expect the Committee to acknowledge the still positive growth in the oil and non-oil sectors amid several bottlenecks while retaining their optimistic outlook on GDP growth (2024FY: 3.32%).
Inflation Risks are Tilted to the Upside
The significant impact of the hike in PMS prices, widespread flooding, and naira depreciation continues to exert upward pressure on consumer prices. Precisely, inflation rose for the second consecutive month in October, climbing by 118bps to 33.88% y/y (September: +55bps to 32.70% y/y), reversing the moderation seen in July (-80bps to 33.40% y/y) and August (-125bps to 32.15% y/y). Notably, food inflation defied the typical relief from the harvest season, driven by sub-optimal harvest yields and elevated transportation costs, rising by 139bps to 39.16% y/y (September: 37.77% y/y). Similarly, core inflation increased to 28.37% y/y (September: -15bps to 27.43% y/y), following a dip in the previous month, reflecting the effect of higher transportation costs and continued naira depreciation. On a month-on-month basis, headline inflation edged higher by 12bps to 2.64% (September: 2.52% m/m). We anticipate the MPC will emphasize the persistence of inflationary pressures, reflecting the extended effects of PMS price hikes and flooding in key food-producing regions. Additionally, the Committee is likely to caution that inflation risks remain skewed to the upside, with festive-induced demand expected to intensify price pressures in the coming months.
Renewed FPI Interest Supports Market Liquidity
We highlight the significant improvement in FX market liquidity, which is primarily driven by the increased inflows from foreign investors following their renewed interest in the domestic capital market due to attractive naira yields and a fairly valued naira. Specifically, total inflows into the Nigerian Autonomous Foreign Exchange Market (NAFEM) rose to a five-month high in October, climbing by 40.2% m/m to USD3.04 billion (September: USD2.17 billion). Foreign inflows surged significantly by 292.7% m/m to USD1.36 billion, with FPIs contributing 86.0% to total inflows from the segment. However, local inflows declined by 7.5% m/m to USD1.69 billion due to reduced contributions from the CBN (-14.32% m/m), individuals (-30.57% m/m), and non-bank corporates (-8.6% m/m).
Additionally, inflows to the NAFEM as of 15 November reached USD2.28 billion from 1 November, with FPI inflows (USD991.80 million) remaining robust. Elsewhere, the FX reserves reached a significant milestone, crossing the USD40.00 billion threshold for the first time in 35 months and rising by 22.0% YTD to USD40.28 billion as of 20 November.
Meanwhile, the naira remained under pressure despite the improvement in market liquidity, as the overall supply remained insufficient to keep the naira stable. The NAFEM rate depreciated by 2.4% m/m to an average of NGN1,631.71/USD, compared to NGN1,592.89/USD in September. So far in November, the naira has traded within a broader range of NGN1,685.00/USD to NGN1,707.50/USD, reflecting ongoing pressures. In our view, the CBN’s cautious interventions, despite the gains in reserves, underscore both a weak net FX reserve position and a deliberate effort to let the naira align with its fair value. We expect the MPC to note the sustained pressure in the FX market amid the efforts of the CBN to stabilize the naira, attributing it to seasonal factors. Furthermore, the MPC is likely to emphasize the goal of maintaining a market-reflective exchange rate.
Global Central Banks Extend Rate Cuts
Global central banks have continued to ease policy rates, even as inflation remains near their short-term projections. Notably, central banks now perceive risks as roughly balanced, a shift from earlier concerns about upside risks despite inflation slightly exceeding the set targets.
In the United States, the Federal Reserve, for the second consecutive time, reduced the target range for the federal funds rate, albeit at a slower pace. On 7 November, the Committee lowered the rate by 25bps to 4.50% – 4.75% (previously 4.75% – 5.00%), following the 50bps cut in September. The Committee acknowledged robust GDP growth alongside a softening labour market while highlighting progress in steering inflation toward the 2.0% target. Looking ahead, despite October’s inflation uptick to 2.6% (20bps higher), we anticipate further policy rate easing as recent data aligns with market expectations.
In the Eurozone, subdued growth and inflation below target (1.7% y/y in September) prompted the European Central Bank (ECB) to cut key policy rates for the third time this year. In October, the ECB reduced the deposit facility, main refinancing operation, and marginal lending facility rates by 25bps each to 3.25%, 3.40%, and 3.65%, respectively. The Committee expressed optimism about the ongoing disinflationary process, deeming it “well on track.” Although inflation may temporarily exceed the 2.0% target, we expect the ECB to implement another 25bps rate cut before year-end to stimulate economic growth.
In contrast, the Bank of England (BoE) has taken a more cautious approach to monetary easing due to persistent core and services inflation pressures and an expansionary UK budget. The BoE’s Monetary Policy Committee voted 8–1 to lower the key interest rate by 25bps to 4.75% (previously 5.00%), marking the second cut of the year and a cumulative reduction of 50bps.
Consistent with the Committee’s “gradual approach” guidance and the recent uptick in inflation, we anticipate the BoE will hold rates steady at the December policy meeting. Consequently, we expect the MPC to acknowledge the global trend of monetary easing while maintaining an optimistic outlook for further rate cuts, which would help mitigate capital flight risk. However, the Committee is likely to underscore the sustained geopolitical uncertainties stemming from the Russia-Ukraine conflict and ongoing tensions in the Middle East.
MPC to Raise the MPR by 50bps to 27.75%
The MPC’s communications from previous meetings have underscored their unwavering commitment to price stability. However, this mandate faces significant headwinds from persistent structural constraints in the supply chain and the recent upward adjustment in PMS prices. While these supply-side bottlenecks will continue to shape the near-term inflation trajectory, we anticipate the MPC will maintain a hawkish stance in line with the goal to (1) anchor inflation expectations and (2) achieve positive real returns to enhance the economy’s attractiveness to international capital, to support naira stability. Given this backdrop, we forecast a further 50bps increase in the MPR to 27.75%, with the other policy parameters maintained.
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