Nigeria: MPR - Experts Forecast CBN's Retention of Rate On Rising Inflation

24 January 2020

As the Central Bank of Nigeria's Monetary Policy Committee meets to decide on the nation's Monetary Policy Rate in the 2020 fiscal year, money market and economic experts have predicted the likely retention of the key rates in view of the rising general price level in the economy.

A financial expert and Senior Research Analyst at FXTM, Lukman Otunuga, said the latest inflation rate, which peaked at 11.98% last December, would most likely constrain the Central Bank of Nigeria (CBN) from reducing the key interest rates, particularly the MPR, in the next few months.

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Otunuga noted that with inflationary pressures making an unwelcome return into early 2020 fiscal year and moving further away from the CBN 9% upper target band, the Naira will continue to be vulnerable.

He said: "Although Central Bank Governor, Godwin Emefiele said in November 2019 that 'the impact of the border closures on inflation is temporary,' this may be questioned if inflation continues to escalate in 2020.

"Rising inflationary pressures should force the CBN to maintain status quo on interest. rates."

He also added that all eyes will be on the Loan to Deposit Ratio (LDR) for banks, which is now set at 65%, adding that with monetary easing out of the question, the apex bank could increase the loan to deposit rate to 70% in an effort to boost economic growth through investments in Nigeria's real sector, particularly small and medium-sized enterprises.

Analysts at Cordros Capital have their views aligned with Otunuga's.

They noted that, while the economy should benefit from exchange rate stability given the still healthy FX reserves, possible implementation of VAT hike, the impending electricity tariff revision, and the impact of the continued land border closure on food prices will exert upward pressure on inflation.

"In response, we suspect that the monetary policy committee will leave the MPR unchanged, despite its recent focus to redirect credit to the private sector," they added.

Consumer prices in Nigeria accelerated for the fourth straight month in December last year, hitting its highest level since April 2018 at 11.98% as food prices continued to climb amid the on-going border closure

But Prof. Yima Sen, a lecturer at Baze University, Abuja, told our correspondent on the phone that the CBN should lower benchmark interest so the bank can lend to the real sector at reduced cost.

He noted that if the interest rates are high and prohibitive, it kills entrepreneurship and stifles economic growth.

He said "sometimes we wonder how businesses survive in Nigeria", adding that if the CBN keeps benchmark interest rate high, the banks will definitely pass it on to consumers.

He also chided the banks for not doing proper banking businesses.

Prof. Sen also noted that now that the federal government has signed the African Continental Free Trade Area, the Nigerian business environment cannot afford not to be competitive.

According to him, if Nigerian manufacturers cannot produce at competitive international standards, made- in-Nigeria goods might not be competitive in the market place.

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