Analysts see CBN easing policy rates aggression as MPC meets

• Further increases in rate should not be expected- Prof. Uwaleke

Onome Amuge

The Central Bank of Nigeria (CBN) is set to hold its 299th Monetary Policy Committee meeting, the first of the year, in a highly anticipated two-day event starting on Wednesday, February 19 and concluding on Thursday, February 20, 2025.

As the CBN prepares to make a crucial decision on the Monetary Policy Rate (MPR), which could either be held or hiked, economic stakeholders and investors across the country are eagerly anticipating the outcome of this meeting, expected to be heavily influenced by the current trends in Nigeria’s economic conditions.

The CBN’s Monetary Policy Committee held its final meeting of 2024 in November on a hawkish note, raising the MPR by 25 basis points to 27.50 percent, marking the sixth consecutive time hike. The MPC’s decision was primarily influenced by inflationary pressures, with the Consumer Price Index (CPI) standing at 33.88 percent in October 2024.

The meeting sought to address the persistent inflationary challenges faced by the Nigerian economy and to promote price stability, thereby enhancing economic growth and prosperity. Olayemi Cardoso, the CBN governor reiterated the MPC’s focus on price stability, emphasising the economic principle as the bedrock of a thriving Nigerian economy.

The MPC maintained key policy rates, including the asymmetric corridor at +500/-100 basis points, Cash Reserve Ratio of Deposit Money Banks at 50 percent and Merchant Banks at 16 percent, and the Liquidity Ratio at 30 percent.

The Nigerian economy, however, continued to face mounting inflationary pressure, with December 2024 CPI hitting an almost 30-year high of 34.8 percent, up from 34.6 percent in November 2024, marking the fourth consecutive month of increased inflation.

Cardoso, in defence of the MPC’s interest rate hike, stated: “The Central Bank is resolute and committed to continuing to fight the war against inflation and there is no going back on that.

“We are going to deploy everything in our arsenal to ensure that we are able to tame it. And of course, this entails the return to orthodox monetary policies.”

As the MPC prepares for its first meeting of 2025, it faces a critical decision of easing,maintaining or hiking the current policy rate as it moves to address inflationary pressures that have reached historic highs.

According to analysts, this meeting carries enormous weight for Nigeria’s economic future, as the MPC’s choices will influence interest rates, inflation control strategies, and the broader macroeconomic stability of the country, setting the tone for the Nigerian economy’s path forward in 2025.

In his analysis of the upcoming MPC meeting, Uche Uwaleke, president of the Association of Capital Market Academics of Nigeria (ACMAN), noted that the MPC may put an end to its trend of increasing the MPR, citing the the release of a revised Consumer Price Index by the National Bureau of Statistics (NBS) and the anticipated easing of inflation rates as a key factor.

Uwaleke stated that further increases in the MPR should not be expected given the high-interest rate environment in Nigeria.

According to the Capital Market professor, the country’s current economic landscape already features high-interest rates, and additional tightening could potentially worsen the challenges faced by businesses and consumers.

“We need to ramp up output. To be able to do that, we need a low interest rate environment. If you take the case of Sub Saharan Africa, our policy rate is about the highest at 27.5 percent followed by Ghana at 27 percent.

“The MPR is not only higher at 27.5 percent, we also have high cash reserve requirements of 50%. So, the two combined to ensure that the cost of credit is quite high in Nigeria,” he noted.

Uwaleke acknowledged the MPC’s aggressive stance over the past year, which saw the MPR rise by 875 basis points between February and November, a result of the liquidity injections in the economy following the fallout of the Ways and Means advances. He observed that the CBN’s policy actions, while necessary in managing the monetary implications of the Ways and Means, may have reached a point of saturation, as further increases in the MPR could be counterproductive.

While recognising the potential for a shift towards a dovish  monetary policy stance, Uwaleke echoed a concern previously raised by the MPC members regarding excessive government spending, which has undermined effective monetary policy implementation in Nigeria.

Commenting on the implications of this fiscal challenge, Uwaleke observed that most of the time, the MPC is challenged by what some have described as ‘fiscal surprises’ and the huge spending that goes to complicate the issue of money supply, making it challenging to implement effective monetary policy.

Uwaleke therefore underscored the need for greater fiscal coordination to address the challenge of excessive government spending, which often undermines monetary policy efforts.

Analysts at BMI, a Fitch Solutions company, in a recent article entitled “Moderating Inflation To Prompt Interest Rate Cuts In Nigeria In 2025”, stated that the November hike in the Monetary Policy Rate is likely to mark the end of the CBN’s aggressive tightening cycle, which saw an accumulated 1600 basis points increase over a period of two and a half years.

“We expect the CBN to leave the benchmark interest rate unchanged at the first MPC meeting of 2025,” they stated.

The BMI analysts believe that the CBN’s MPR has reached its terminal rate of 27.50 percent in late 2024, meaning that further rate hikes are unlikely. They projected further that the CBN will commence a gradual easing of monetary policy in 2025, resulting in cumulative interest rate cuts totaling 450 basis points.

Experts at Meristem Securities shared the view that the CBN’s monetary policy stance is likely to become less aggressive, particularly given the CBN’s  expressed intention to assess the impact of its previous policy measures.

Meristem analysts noted that the CBN’s desire to evaluate the outcomes of its prior policy decisions, coupled with the anticipated decline in inflationary pressure, may prompt a shift towards a more accommodative monetary policy approach.

“Given the risk that premature easing could reverse the progress made in 2024 and exacerbate inflationary pressures, we expect the MPC to maintain a HOLD stance for most of 2025. A shift to a more dovish position may occur in the final quarter of the year. While unlikely, we cannot entirely rule out the possibility of an additional 100 bps hike in the MPR during the first quarter of 2025,” the analysts noted.

Economist Biodun Adedipe, speaking at FirstBank’s recent Economic Outlook event, forecasted that the MPR is likely to experience a slight decline during the first quarter of 2025, with the bank lending rate remaining in double digits, tracking the CBN’s MPR adjustments.

According to Adedipe, these expectations are based on the belief that the CBN will maintain its focus on containing inflation while also considering other economic factors, ultimately leading to a more measured approach in the near-term.