The Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) is facing a critical decision as it prepares to meet next week, amid conflicting economic signals. The recent slowdown in inflation, alongside a steep increase in petrol prices, has created a complex environment for policymakers.
Inflation in Nigeria has declined for the second consecutive month, reaching 32.15 percent in August 2024, down from 33.40 percent in July, according to data from the National Bureau of Statistics (NBS). Analysts initially projected that the MPC might consider lowering the benchmark interest rate to stimulate economic activity. However, the sudden rise in petrol prices has introduced a new challenge, leaving the committee at a crossroads.
On Monday, the Nigerian National Petroleum Company (NNPC) Limited raised petrol prices by 11 percent, marking the second hike in two weeks. The price of petrol in Lagos increased from N858 ($0.53) per litre to N950, and up to N1,019 in northeastern states. This follows the NNPC’s recent shift to sourcing fuel from the Dangote Oil Refinery, a move that has sparked debate over the pricing mechanisms used.
The petrol price hikes, which reflect a 50 percent increase in a matter of weeks, have raised concerns about renewed inflationary pressures. According to analysts, the MPC now faces a dilemma: while slowing inflation could justify a rate cut, rising fuel costs might reignite inflation, undermining the benefits of monetary easing.
Tilewa Adebajo, CEO of The CFG Advisory, expressed doubts about a potential rate cut. “Fuel price increases will directly impact inflation, so it leaves the MPC in a dilemma,” he noted. Similarly, Ayodele Akinwunmi, a senior relationship manager at FSDH Merchant Bank, argued that it may be too soon to celebrate the recent inflation drop, as the petrol price hikes could reverse the trend. “The inflation rate at 32.15 percent is still very high. Changing monetary policy stance may be premature,” Akinwunmi said.
The MPC will convene from September 23 to 24, 2024, and its decision is eagerly awaited by businesses, consumers, and market players. While the slowing inflation trend offers some room for optimism, the surge in petrol prices has complicated the outlook. Analysts have suggested that holding the interest rate at its current level of 26.75 percent might be the most prudent course of action.
Ayokunle Olubunmi, head of financial institutions ratings at Agusto Consulting, echoed this sentiment, saying, “The hike in fuel prices has changed the dynamics. We expect the impact to further intensify inflationary pressures, so holding rates is the best-case scenario.”
Ayodeji Ebo, managing director of Optimus by Afrinvest, pointed out that the recent moderation in inflation was largely due to the base effect, rather than a significant reduction in the prices of goods and services. “While we have seen a reduction in month-on-month inflation, at 2.2 percent in August, this is still relatively high when annualized. The MPC should allow more time to establish a trend before considering any rate cut.”
Coronation Merchant Bank Limited analysts also forecast that the MPC will maintain the benchmark rate at 26.75 percent, given the current inflation trajectory. Meanwhile, experts at FBNQuest suggested that the committee may pause its rate tightening cycle to assess the economic impact of previous rate hikes.
At its July meeting, the MPC raised the policy rate by 50 basis points to 26.75 percent, adjusting the asymmetric corridor around the Monetary Policy Rate (MPR) to +500/-100 basis points. This move followed a series of rate hikes aimed at curbing inflation, which has remained stubbornly high in recent years.
As the MPC prepares to meet, the stakes are high. The decision to either hold or raise rates will have far-reaching implications for Nigeria’s economic stability, especially as the nation grapples with the twin challenges of inflationary pressures and sluggish growth.
