2022 MPC Final Meeting: Why We Expect the CBN to Increase the MPR

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The Central Bank of Nigeria Monetary Policy Committee (MPC) is scheduled for its final meeting of the year, where deliberations will take place on the next policy direction for 2023.

In the last three meetings, the CBN had taken an aggressive monetary approach, raising the benchmark interest rate by a cumulative 400 basis points, from 11.5% to 15.5%, which represents the highest in more than 20 years. At the last MPC meeting, the CBN also raised the cash reserve requirement (CRR) to a minimum of 32.5% in an attempt to absorb liquidity.

Meanwhile, despite the aggressive move by CBN’s MPC, Nigeria’s inflation rate has not slowed, hitting a new 17-year high of 21.09% in October 2022 with no signs of abating. The CBN now faces the daunting task of curbing the rising cost of goods and services, as well as reducing the amount of cash in circulation.

Money supply at the highest level: Nigeria’s ample money supply, which gives an indication of the amount of currency in circulation, as well as demand deposits at banks, savings deposits have raised by more than N15.8 trillion between December 2019 and October 2022 to stand at N50.58 trillion, the highest ever.

  • In the same period, currency in circulation increased by 855.8 billion naira to 3.29 trillion naira, while credit to the private sector exceeded 14.1 trillion naira to 40.8 trillion naira thanks to the cheap credit regime adopted by the CBN to stimulate growth in the real sector after the COVID-19 pandemic.
  • However, despite the CBN’s more restrictive stance in recent months, Nigeria’s money supply has yet to ease, instead rising by more than N6.76 trillion in the past 10 months.

Policy Options: At this point, the MPC is faced with only two options: maintain or increase the benchmark interest rate. Considering that an easing approach would mean a broader negative real return, which would affect people’s saving sentiment.

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  • With the inflation rate currently at 21.09% and an interest rate of 15.5%, this translates into a negative real return of 5.59%, thus eliminating the possibility of a MPR reduction.
  • The CBN has announced the redesign of the local currency for the highest denomination, which aims to reduce the amount of money currently in circulation, while combating demand-side inflation and exchange rate volatility.
  • It would be safe to wait for the CBN to maintain a monetary stance to see how redesign of the naira would affect prices and the value of the currency. However, a tightening decision could further encourage investors to save in naira rather than invest in dollar-denominated assets.

Possible MPC result: Our internal analysts expect a hawkish stance though between 50bp and 100bp, which would take the MPR to around 16-16.5%. Considering that the month-on-month inflation rate is beginning to show signs of slow growth, the CBN could be inclined to increase the MPR at a modest pace to also avoid the downside risk in economic activities.

Our predictions are based on the following:

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  • The money supply has risen to its highest level on record, and more money continues to chase fewer goods.
  • Due to the flooding in the country’s food-producing areas, Nigeria’s food inflation is likely to remain high, as is the expected increase in demand over the Christmas period.
  • Finally, with other economies raising interest rates and Nigeria still grappling with a negative real yield of over 5%, the CBN needs to incentivize investors and individuals to invest and save in naira rather than foreign denominated investments. .

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