There are many indications that the Monetary Policy Committee of the Central Bank of Nigeria will increase the monetary policy rate by 100 basis points this week.
The MPC is expected to meet on November 20 and 21 after the failure of its September political meeting to appoint a new CBN governor.
Since the last MPC meeting in July, the monetary policy space has changed rapidly, given the certain orthodoxy introduced by the CBN, especially since early October.
A report published on Friday by Cordros Capital and shared with The PUNCH suggests that “further increases in interest rates by the MPC will send a strong signal that the largest bank will not relent in the fight against inflation, especially as short-term inflation expectations are tilted upwards, potentially peaking at level of 28.02 percent y/y in December.
“In addition, we believe that maintaining the MPR rate at its current level will not be synchronous with a continued increase in market interest rates.
“Thus, to align with recent increases in market interest rates, the Committee is likely to be more supportive of further increases in the MPR so that (1) the MPR remains a key signaling tool for market interest rates and (2) inflationary pressures remain intact.
Therefore, we expect that the Monetary Policy Council will increase the MPR rate by at least 100 basis points at the November policy meeting,” the report reads.
The significant changes that have occurred in the monetary space since the last MPC meeting include: (1) removal of the maximum limit on the Fixed Depository Fund (SDF) auction and (2) OMO. In the following paragraphs we discuss these monetary policy measures introduced since the July policy meeting and their impact on our expectations at the November 21 Committee meeting.
After a gap of about eight months, the CBN finally auctioned the OMO bills on August 10. Despite the high subscription to offer ratio (Bid-offer ratio: 2.1x), retention rates averaged 12.49% over 96 days (10.00%), 187 days (12.98%) and 362 days ( 14.49). %) of vouchers – exceptionally above the average level of 8.50%. at auction in December 2022.
However, after this auction, the CBN held another one only on October 30, during which it sold USD 400 billion, with the rate of the 365-day bill at 17.50% (annualized: 21.20%).
Two days later, the CBN auctioned another OMO note, selling instruments worth P77.20 billion. The retention rate averaged 15.36% over the three dates, with a 365-day closed account rate of 17.98% (effective yield: 21.91%). Regardless of how frequent OMO auctions become, we believe their purpose is to serve a dual function: (1) replenishing system liquidity and (2) attracting FPIs. In case (1), as system liquidity depletes due to frequent OMO auctions, local yields will increase, making naira assets more attractive.
In terms of inflation, domestic price pressures continued their upward trend, reaching a higher level of 27.33% in October (compared to July: 24.08% y/y | September: 26.72% y/y), with pressures resulting from both on the food side (+88 basis points to 31.52% y/y) and basic baskets (+73 basis points to 22.58% y/y).
Elsewhere, currency pressures remain unchanged and year-to-date, local players remain the main drivers of volumes in the Nigerian Autonomous Foreign Exchange Market (NAFEM). However, we understand that foreign investors are starting to show some interest, likely due to the OMO auctions and growing optimism that the CBN has started to deliver some of the outstanding foreign exchange contracts.