Monetary Policy Committee Likely to Raise the MPR by 25 bps to 27.5%
The Monetary Policy Committee (MPC) commenced its two-day meeting today, November 25, 2024, with the policy decision expected to be announced tomorrow. This will mark the last MPC meeting for the year. Based on prevailing economic conditions, the committee is expected to maintain its hawkish monetary stance, increasing the Monetary Policy Rate (MPR) by a modest 25 basis points. If this occurs, it will be the 6th consecutive rate hike in 2024, bringing the total increase to 875 basis points.
Here are Key factors to Consider In Relation to This Increase:
Inflationary Pressures: Inflation remains a major concern, with persistent pressures continuing to shape the MPC's decision-making. After a brief decline in July and August, headline inflation has surged again, rising to 33.88% in October from 32.7% in September. The sustained inflationary trend reflects underlying supply-side constraints and structural challenges within the economy. With inflation remaining high, it is expected that the MPC will focus on tightening monetary policy, even as this comes at the risk of further slowing economic growth.
Foreign Exchange Pressures: The Naira continues to face significant depreciation due to a mismatch between foreign exchange (forex) demand and supply. Demand for forex has been heightened by:
Despite the CBN’s ongoing interventions in the forex market, the rate of intervention has not kept up with the growing demand, leading to continued pressure on the Naira. As a result, the Naira has weakened, trading at a 3-month low of N1,750/$ in the parallel market and a year-to-date low of N1,690.33/$ (as of November 18) at the NAFEM window. Although, as friends and family visit towards the end of the year, there is likely to be a boost in dollar supply, thus reducing the pace of Naira depreciation.
Possible Impact on the Economy and Markets
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Impact on the Economy
Further squeeze in Disposable Income: As prices rise and borrowing becomes more expensive, households would continue to grapple with squeezed disposable income, leading to reduced consumer spending. This can hurt businesses that rely on domestic demand, especially in retail and service sectors. In addition, squeezed disposable income will reduce savings and investment capacity for individuals.
Increased Finance Costs & Reduced Profitability: Higher interest rates will push up the cost of borrowing for companies, weighing on profitability
Slower Economic Growth: Overall economic activity may decelerate as higher interest rates crowd out private investment, limiting firms’ expansion plans and reducing productivity. This would be worsened by weakening aggregate demand.
Increased pressure on government finances: Higher interest rates will push up the cost of government borrowing, putting pressure on government finances.
Impact on Financial Markets:
Fixed-income Market: Higher interest rates would make bonds and other fixed-income securities more attractive to investors, as they offer better returns.
Stock Market: Rising interest rates typically make equities less attractive to investors, as the opportunity cost of holding stocks increases relative to bonds and other fixed-income investments. If interest rates continue to rise, investors may shift away from equities towards more secure, interest-bearing assets, potentially leading to declines in the stock market.