CBN to further increase interest rates in second half of 2024- Fitch

Global credit ratings agency, Fitch Ratings, has projected further hike in monetary policy rates by the Central Bank of Nigeria (CBN) in the second half of the year.

This was disclosed in its recently released credit outlook for Nigeria where the country’s sovereign credit default outlook was raised from stable to positive on the back of recent reforms in the monetary policy and oil and gas sector.

According to the report, the hike in interest rates in the first quarter of the year has seen the apex bank carry out open market operations at rates closer to the MPR.

Furthermore, the agency projected inflation- the major target of the MPR hike by the CBN is expected to moderate to 26.3% later this year and 18.2% by next year.

It stated, “Fitch anticipates further increases in the CBN monetary policy rate in 2H24 (following the 600bp hike to 24.75% since February 2024 alongside tightening of reserve requirements) and strengthening of monetary policy transmission, after the recent resumption of open market operations at rates closely aligned to the MPR.”“We project inflation, which rose to 33.2% yoy in March due partly to exchange rate pass-through and rising food prices, to average 26.3% in 2024 and 18.2% in 2025, still well above our projected ‘B’ median of 4.5%.”

Backstory

The Central Bank of Nigeria (CBN) in its first two Monetary Policy Committee (MPC) meetings in 2024 raised MPR by record 400 and 200 basis points respectively to 24.75%. The bank noted that the aim of the hike is to tame inflation and bring stability to the volatile foreign exchange market.

However, inflation in the past months has defied the policy moves of the apex banks rising from 90% in January to 33.2% as of March 2024. More worrisome is food inflation which currently stands at 40.01% in March 2024.The hike in MPR has seen increased appetite for federal government and CBN securities especially from foreign portfolio investors as yields have risen above 20%.The apex bank will hold in its Monetary Policy Committee (MPC) meeting on the 20th and 21st of May, 2024 where it reviewed events in the global economy and Nigeria’s to decide to reduce, hold or further increase MPR.