Nigeria: MPC May Hold Rates Despite Lower Inflation - Experts

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As the members of the Monetary Policy Committee (MPC) meet today and tomorrow to determine the policy direction of the Central Bank of Nigeria, analysts say they expect rates to remain unchanged despite a surprising easing in inflation figures announced last week by the National Bureau of Statistics (NBS).

Although many had expected inflation figures to continue trending upwards on imported inflation, the figures released by the NBS showed that the rate at which prices of goods and services in the country rise, slowed to 18.12 per cent in April from 18.17 per cent in March this year. The decline in inflation however does not necessarily imply that prices are falling. It simply means that commodity prices are increasing albeit at a slower pace.

Despite the easing in inflation, analysts say the MPC is less likely to consider this as a trend and thus cut benchmark rates. At the last MPC meeting in March, three out of nine of the members had voted to raise benchmark interest rates to stem the rising tide of inflation.

Inflation rate which has doubled beyond the CBN target of nine per cent, had been a major consideration by all members of the committee and while the respite in the April figure may not be enough to cut rates, analysts say it may placate the hawks hoping to further tighten monetary policy.

According to analysts at Financial Derivatives Company Limited, all eyes will now be on the MPC at their meeting next week to see their reaction to the unexpected drop in inflation. "The GDP numbers are scheduled for release on May 24. We are projecting a mild contraction of 0.5 per cent. Our view is that the committee would maintain its current stance and watch the indicators closely. This is because inflation is likely to increase again in the month of May due to output shocks and supply chain disruptions as a result of heightening insecurity. This will be compounded by exchange rate pressures and higher logistics costs," the analysts said.

This was also the view of analysts at Cowry Assets Management Limited, who noted that while there may be a possibility of a further tightening, the committee is expected to maintain status quo. The analysts said, "Despite the surprise moderation in inflation rate, we remain cautiously optimistic and expect prices to remain sticky due, in part, to the ongoing rainy season and the lingering effects of structural bottlenecks and insecurity.

"We expect the MPC to at least hold Monetary Policy Rate (MPR) constant. Nevertheless, we do not rule out the possibility of the Committee increasing the MPR in order to further consolidate its move to stabilize the depreciating exchange rate."

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