The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) is scheduled to hold its first meeting of the year on February 19th and 20th. In line with previous meetings, the Committee is expected to assess both global and domestic economic developments.
Despite persistent global risks, including the ripple effects of US trade tariff hikes and a negative real rate of return, we believe the MPC’s decision will be primarily influenced by near-term expectations of moderating inflation and the continued stability of the naira at the Nigerian Foreign Exchange Market (NFEM).
Given these conditions, we expect the MPC to pause its prolonged rate-hiking cycle, allowing the impact of previous rate increases to fully transmit through the economy. Overall, our baseline view is that the MPC will hold the Monetary Policy Rate (MPR) steady and maintain all other policy parameters at the upcoming meeting.
Economic Activities Remained Strong in Q4-24
In line with the CBN’s data on the Purchasing Manager’s Index (PMI), we believe that economic activity in the non-oil sector remained resilient in Q4-24, supported by improved FX liquidity, the harvest season, and festive-driven demand.
Notably, after two months of contraction, the PMI rebounded to 51.0 points in December (October: 49.6 points), driven by strong expansion in the Services (52.1 points vs October: 50.0 points) and Agricultural (52.7 points vs October 50.3 points) sectors. Additionally, the Industrial (50.0 points vs 49.3 points) sector emerged from contractionary territory for the first time since January 2024, signalling a broad-based recovery.
In the oil sector, crude oil production averaged 1.63 mb/d in Q4-24, representing a 5.2% increase from the 1.55 mb/d recorded in Q3-24. We attribute this growth to increased pipeline surveillance and the increased oil production from new oil fields. Overall, we estimate that GDP expanded by 3.70% y/y in Q4-24, compared to 3.46% y/y in both Q3-24 and Q4-23.
Consequently, we anticipate that the MPC will maintain an optimistic outlook, confident that the economy will remain on a growth trajectory despite the impact of monetary tightening. The Committee is likely to emphasize the importance of price stability as a critical driver of sustainable growth over the medium term.
Consumer Prices Expected to Fall in the Short Term
Consumer prices are poised to moderate in the near term, primarily driven by a high statistical base in the previous year, a lower exchange rate pass-through following stability in the naira and lower increases in energy prices.
Using the current methodology (2009 base year), we estimate the headline to ease by 50bps to 34.30% y/y in January (December: 34.80% y/y).
Additionally, the weight adjustment in the inflation basket under the proposed inflation methodology (2024 base year) could induce a steeper fall in inflation below our estimate. Consequently, we expect the Committee to adopt an optimistic stance on inflation moderation, highlighting the impact of CPI rebasing, naira appreciation, and the recent decline in diesel prices as key drivers.
Naira Stabilizes in the NFEM on Improved FX Liquidity
The naira has been relatively stable in the NFEM market, primarily supported by improved FX liquidity from both FPIs and the CBN, despite still strong FX demand as well the adoption of the Electronic Foreign Exchange System (EFEMS), which helped tamed excess naira volatility through increased market transparency.
According to the data obtained from FMDQ, total inflows into the NFEM surged by 53.3% m/m to USD4.74 billion in January (December: USD3.09 billion), driven by higher contributions from both foreign and domestic sources.
Foreign inflows rose substantially by 192.1% m/m to USD2.31 billion (December: USD790.30 million) – the highest level in 23 months — driven mainly by higher FPI inflows (+213.0% m/m) due to stronger market confidence and high carry trade opportunities.
Meanwhile, inflows from other corporates (-45.4% m/m) and foreign direct investment (FDI) (-36.5% m/m) declined. Similarly, local FX inflows rose by 5.6% m/m to USD2.43 billion (December: USD2.30 billion), driven by higher contributions from individuals (+33.2% m/m), exporters/importers (+20.9% m/m), and CBN (+20.1% m/m), despite a decline in non-bank corporate inflows (-10.7% m/m).
Amid the surge in inflows, the naira appreciated by 4.3% m/m, reaching NGN1,474.78/USD as of 31 January (31 December: NGN1,538.25/USD). However, FX reserves declined by 4.5% YTD to USD39.04 billion (as of 14 February), reflecting increased CBN market interventions and external debt service payments.
The MPC is expected to highlight the recent naira stability in the NFEM market, attributing it to increased foreign inflows. The MPC is also expected to acknowledge the role of EFEMS in achieving better price discovery and market transparency. The Committee is also expected to maintain optimism for naira stability in the medium term, citing improved market confidence and reduced distortions.
Global Central Banks Signal Caution Amid Economic Uncertainty
Central banks across major economies are adopting a cautious stance on monetary policy, driven in part by concerns over the potential spillover effects of new US trade policies, particularly tariff hikes.
Specifically, the Federal Open Market Committee (FOMC), at its January policy meeting, voted to keep the target range for the federal funds rate unchanged at 4.25% – 4.50% after three consecutive months of easing.
Notably, the Committee cited heightened economic uncertainty and signaled its intention to monitor the impact of US policy changes, particularly under the new administration, before making further adjustments to interest rates. Consequently, we expect the US Fed to keep interest rates at restrictive levels in the near term until a sustainable return of inflation towards its 2.0% target.
The European Central Bank (ECB), on the other hand, maintained its accommodative monetary policy stance, lowering the deposit facility rate, main refinancing operations rate, and marginal lending facility rate by 25bps to 2.75%, 2.90%, and 3.15%, respectively (previously: 3.00%, 3.15%, and 3.40%).
The decision to cut rates, despite a recent uptick in inflation, was driven by the ECB’s fragile growth outlook, which has been further strained by the potential economic fallout from US tariff hikes. Although inflation is expected to remain above the ECB’s 2.0% target in the short term, we believe subdued regional growth will keep the ECB on an easing path in upcoming meetings.
Similarly, the Bank of England (BoE) adjusted its policy stance at the February monetary policy meeting, unanimously voting to lower the bank rate by 25bps to 4.5% (previous: 4.75%). The policy adjustment reflects easing external shocks and progress in curbing domestic inflation.
However, the BoE flagged that the recent US trade tariffs could pose a downside risk to the UK’s GDP growth. While the BoE is likely to remain cautious about further rate cuts, we believe that weak economic growth in the UK could drive additional easing in the near term.
We expect Nigeria’s MPC to acknowledge the mounting risks to the global economic outlook, particularly from a potential trade war triggered by US tariff hikes and retaliatory measures from affected countries. The Committee is expected to monitor global developments closely, focusing on their impact on Nigeria’s trade and inflation outlook while assessing the potential spillover effects on naira and capital flows, given increased global market volatility.
MPC Likely to Retain the MPR
Building on cues from the November 2024 MPC meeting, we expect the Monetary Policy Committee (MPC) to adopt a forward-looking approach in determining its monetary policy stance.
We believe the MPC anticipates a moderation in inflation in the near term, supported primarily by naira stability.
Additionally, we see limited room for further interest rate hikes by the MPC despite the existing negative real rate of return, considering the potential impact on borrowing costs for both corporations and the government.
We do not expect the MPC to consider a rate cut given (1) still elevated inflation, (2) persistent global economic risks and (3) the need to maintain the naira’s attractiveness to foreign investors and sustain FX inflows.
As such, we expect the MPC to pause its tightening cycle, opting to assess the impact of previous rate hikes on the anticipated disinflation process before making further adjustments. Our baseline view is for the MPC to adopt a HOLD stance and retain other policy parameters.
Cordros
