*Analysts predict Another Hike In Rate, Banks Prefer Investments In T/Bills To Real Sector
The Central Bank of Nigeria (CBN)’s Monetary Policy Committee (MPC) begun its final two-day meeting of the year on Monday, November 25, in Abuja with twin challenges of depreciating naira and rising inflation topping the agenda of the meeting.
But despite the rise in the gross domestic products (GDP) for the third quarter of the year, the economy has been wobbling with the consequential rise in poverty level.
Amid rising hardship and poverty, Nigeria’s GDP has grown by 3.46% year-on-year in real terms during the third quarter of 2024.
The National Bureau of Statistics (NBS) made this known in its GDP report published on Monday, saying the growth rate is higher than the 3.19 percent recorded in Q2 2024.
The bureau said the growth rate is also higher than the 2.54 percent recorded in the third quarter of 2023.
The growth in Q3 2024 was primarily driven by the Services sector, which expanded by 5.19% and accounted for 53.58% of the aggregate GDP.
However the rise in the yields on Treasury Bills have continued to lure individuals and corporate organizations such as banks to invest in the securities considered as safer and more lucrative.
For instance the banks’ investment in securities, regarded as tradable financial assets such as equities or fixed-income instruments that are purchased to hold them for investment jumped 145 percent in the nine-month period of 2024 due to attractive yields.
Specifically,metrobusinessnews.com (MBN) gathered that, particularly tier one lenders have since commenced allocation of a larger portion of their interest-earning assets to investment in securities rather than giving them as facilities to the real sector as the risk of investment securities is lesser compared to loans.
The development, according to some analysts, is at the expense of the real sector of the economy, suffering from lack of affordable credit facilities.
Despite the ugly trend, the analysts are projecting further hike in the Monetary Policy Rate, seemingly to attract foreign portfolio investments or foreign direct investments.
This is even as investors seem not to be encouraged by the volatility in the foreign exchange market as well as political and security tensions bedeviling the country.
However, the expectations of the analysts are said to be in alignment with the trajectory of the previous rate increases orchestrated by the embarrassing naira volatility and the continual rise in inflation.
More worrisome is the fact that inflation rate has increased from the lowest single digit of 3 percent in July 2006 to 33.88 percent in October 2024, the third highest level after it peaked at 34.19 percent in June 2024.
The annual inflation quickened for the second straight month, raising the prospect of another interest-rate increase as the meeting progresses.
Similarly, the month-on-month inflation rate for October 2024 went up to 2.64 percent, from 2.52 percent recorded in September 2024.
Food inflation, a significant driver of overall inflation, rose to 39.16 percent in October, higher than the previous month.
According to the analysts sustained effects of September floods in the northern region, coupled with the rise in transportation costs, are major contributors to the rise in food prices.
They also attributed it to the high petrol prices and reduced food supply resulting from logistics and transportation costs.
But, CBN, which seems to be fixated on rate hike as the only panacea to tackling inflation menace, has maintained a policy of monetary tightening to curb inflation.
Infact, since it initiated its tightening cycle in 2022, the apex bank has raised its benchmark interest rate, MPR, by 1,525 basis points (bps). This includes 825bps implemented since mid-2023, following President Tinubu’s fuel subsidy removal and foreign exchange reforms.
“Considering the fact that CBN sees rate hikes as the only solutions to rising inflation, not minding their impact on financial intermediation and the real sector, We will expect the bank to raise the monetary policy rate by between 25 to 50 bps at its 26 November meeting,” says Friday Ameh, Lagos based energy analyst.
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According to him, the continuous rise in inflation, currently at 33.9 percent y/y, shows a continued pressure on food and transport prices, adding that it reflects the lagged effect of earlier flooding in northern Nigeria, and possibly also the lagged effect of September’s sizable fuel price increase, which was followed by a much smaller increase in October.
“Inflation will continue to rise given that risks remain present and more so that CBN had consistently maintained that Its main objective is to address inflationary pressures and ensure price stability. As such, if inflation continues to trend up, the MPC may likely continue to sustain its hawkish stance to rein it in,” he added
Another analyst said that CBN’s consistent increase in sale of open market operations (OMO) means that it is trying to reduce liquidity to reduce inflation rate and maintain exchange rate stability. But these have not been easy in achieving.”
The CBN sold a total of N7.6 trillion in OMO in the first nine months of 2024 as part of its ongoing efforts to control excess liquidity in the financial system.
This marks a significant increase compared to the N150 billion issued over the same period in 2023, according to data from the CBN.
The move is a clear indication that the apex bank has been actively mopping up excess liquidity from the Nigerian financial system, analysts have observed.
OMO sales are a critical tool used by the CBN to implement its monetary policy objectives. By adjusting the volume of money circulating through these sales, the CBN can influence interest rates, which in turn affect investment, consumption, and economic growth.