The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) raised the MPR again, albeit moderately, by 25bps to 27.50% in the final meeting of the year, culminating in a total rate hike of 875bps in 2024. The decision to raise the MPR further was in line with their goal to (1) curb inflationary pressures, (2) stabilize the naira, and (3) anchor inflation expectations. At the same time, the Committee voted to keep all other parameters unchanged – Cash Reserve Requirement (CRR) for Deposit Money Banks (DMBs) and Merchants Banks at 50.0% and 16.0%, respectively; the asymmetric corridor around the MPR at +500bps/-100bps and the liquidity ratio at 30.0%.
On Domestic Growth: The MPC highlighted the robust GDP growth recorded in Q3-24 (3.46% y/y vs 3.19% y/y in Q2-24), noting the strong contribution across the oil & non-oil sectors. Furthermore, the Committee noted the strong performance in the services sub-sector, which contributed to the overall improvement in the non-oil sector growth. The Committee reaffirmed their GDP growth forecast of 3.32% for 2024E, expressing confidence in the economy’s strength and sustained growth momentum.
On Inflation: The Committee noted sustained price pressures evident in the consecutive increase in inflation for food and non-food items, attributing it to the impact of higher PMS prices and flooding in food-producing areas, eroding gains from the typical main harvest season.
On External Sector: The MPC highlighted improvements in Nigeria’s external sector, reflected in a steady rise in the current account surplus and increased remittance inflows. However, the Committee expressed concern over continued naira volatility driven by persistent demand pressures. Consequently, the Committee urged the Central Bank to intensify efforts to stabilize the naira by enhancing market liquidity. The Committee also acknowledged the steady accumulation of FX reserves, emphasizing that the CBN’s cautious approach to reserve utilization aligns with its strategy to build buffers against periods of extreme volatility and external shocks.
On Global Development: The Committee pointed out that the risks to global growth remain, including the heightened geopolitical tension, such as the Russia-Ukraine war and the conflict in the Middle East. Meanwhile, the Committee expects global inflation to moderate further into 2025 and move towards most Central banks’ targets. Nonetheless, the Committee pointed out that the potential increase in trade tariffs under the new US administration could pose an upside risk to global inflation.
Cordros’ View
The MPC’s decision to raise the MPR aligned with our expectations, even as the 25bps hike – the slowest pace of tightening this year – fell short of our forecast (+50bps) despite mounting inflationary pressures. While reaffirming their price stability mandate, the slower pace suggests the MPC may be approaching the peak of the rate-hiking cycle, though inflation risks remain skewed to the upside. Notably, the MPC acknowledged the lagged effects of monetary policy tightening on inflation, expressing confidence that the impact of earlier rate hikes would begin to materialize by Q1-25.
Looking ahead, headline inflation is expected to increase further in November (+34.60% y/y vs October: +33.88% y/y) and December (+35.19% y/y), driven primarily by the lingering effects of elevated PMS prices, sub-optimal food harvests, and the seasonal uptick in consumer demand following the festive period. At their next meeting in January 2025, the MPC is expected to evaluate consumer price trends and exchange rate stability while upholding its price stability mandate. We anticipate another 25bps hike to 27.75%, followed by a potential pause in subsequent meetings.
Market Impact
Fixed Income: We anticipate that the outcome of the meeting will sustain the bearish sentiment in the fixed income market, even as we expect moderate increases in yields, particularly as we approach the end of the year, which is typically characterized by lower supply. Also, we believe that the elevated inflation outlook, as cited earlier, still portends possible rate hikes, and as such, we expect investors to remain duration averse, preferably maintaining to play at the short end of the yield curve.
Equities: We believe the domestic equities market might react moderately to the outcome of today’s MPC meeting, especially as the current rate tightening cycle may be approaching its peak amid anticipation of the usual year-end rally. As we have previously noted, we expect continued rotation into the banks, especially as they are less affected by interest rate hikes and benefit from increased income on loans and other earning assets.
We also expect investors to take advantage of any price dip in strong-performing stocks as they try to maximise alpha. Nonetheless, we reiterate that as domestic investors continue to dominate proceedings (90.6% market share as of October), sensitivity to any movement in fixed income yields will remain a downside to market performance in the medium term.
Cordros
