Dear Subscriber,

The CBN is aggressive with monetary policy and it’s promising

The MPC held its second meeting in 2023 yesterday. As expected, the committee raised rates by 50 basis points (bps) to 18%p.a. This is the sixth rate hike since May 2022 and the most aggressive monetary policy cycle in over two decades. Overall, the MPC has increased rates by 650bps.

The hawkish stance, which mirrors global trends, is premised on cooling inflation that inched up marginally by 0.1% to 21.9% in February and protecting the naira’s peg to the US dollar as the Federal Reserve shows no sign of letting up its tightening stance.

Inflation expectations are pointing toward higher prices

More importantly, the rate hike was a precautionary move to anchor inflation expectations in the coming months ahead of the planned fuel subsidy removal in H2’23. Although the removal will be gradual, its inflationary impact through higher transport costs is unprecedented. Already, intercity bus fares are up 37% in the last year.

Policy rate up, effective deposit rates down: Markets remain jittery

While the outcome of the meeting was well received by the markets, concerns about the weak transmission mechanism of monetary policy in Nigeria linger. Currently, the yields on the 364-day treasury bill rate and 10-year federal government bond are 9.5% and 12.5%, respectively, indicating negative real rates of return on investments. This is a big disincentive to investment inflows and a testament to the defiance of Nigerian markets to economic theory.

More jarring is that borrowing costs will increase further, stalling business expansion plans and potentially slowing output growth. In February, the Stanbic IBTC purchasing managers index fell by 16% to 44.7 points from 53.5 points in January. As a result, we expect real GDP to fall to 1.25% in Q1’23.

Cash crunch to end in April and ATM queues are set to decline

Before the next MPC meeting in May, we expect cash in circulation to increase, enabling business and consumer transactions. ATM queues will begin to reduce and over the counter cash will be available at banks. Also, headline inflation could slow on base effects, while currency pressures linger, albeit mildly.

In the slides and video link below, Bismarck Rewane breaks down the implications of the recent interest rate hike on investors, businesses, and consumers. He also hints on the possible fiscal and monetary policy moves ahead of the handover ceremony in May.

Do enjoy your read…….