The Monetary Policy Committee (MPC) has commenced its final two-day meeting of 2024 in Abuja, with analysts widely anticipating a hike in the Monetary Policy Rate (MPR) by 25 to 50 basis points, buoyed by recent quarterly economic gains.

The MPR hike is driven by Nigeria’s persistent inflationary pressures, volatile naira, and ongoing economic reforms.

Nigeria’s inflation surged to 33.88% in October 2024, up from 32.7% in September, according to the National Bureau of Statistics (NBS). This marks the third-highest inflation rate in the country’s history, only trailing the 34.19% peak recorded in June 2024.

The Central Bank of Nigeria (CBN) has aggressively implemented monetary tightening since 2022, raising the MPR by 1,525 basis points (bps) over the period, including 825 bps since mid-2023.

The inflationary pressure stems primarily from supply-side factors, such as flooding in northern Nigeria, rising food prices, and transportation costs.

Razia Khan of Standard Chartered Bank told BusinessDay that inflation remains driven by these shocks rather than excessive demand.

“This follows a rise in October inflation to 33.9 percent y/y, reflecting continued pressure on food and transport prices. Given meaningful monetary tightening in recent months, the October inflation uptick was much faster than we had expected. In our view, 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. Supply-side shocks, rather than excessive demand, continue to drive Nigeria’s inflation,” she said.

Other analysts who spoke to BusinessDay broadly expect the CBN to raise the MPR in response to persistent inflation and naira volatility. Ayodeji Ebo of Afrinvest suggests a 25-50bps hike to maintain the attractiveness of naira-denominated assets and reduce pressure on foreign exchange.

“Given the unrelenting rising inflation, I expect the CBN MPC to raise the MPR by 25-50bps to keep the interest rate attractive and reduce pressure on FX. On the other hand, it will add further pressure on the companies due to the impact on financial costs.”

However, he warns this could add financial strain on businesses due to rising borrowing costs.

Tobi Ehinmosan of FBNQuest Capital Research concurs, emphasizing the MPC’s commitment to addressing inflationary pressures.

“I think the MPC has always reiterated that their 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 in inflation,” Ehinmosan noted.

Meanwhile, Charlie Robertson of FIM Partners UK Ltd expects no rate change, citing fragile confidence in the naira as a potential reason for caution.

The CBN has ramped up its use of Open Market Operations (OMO) to manage liquidity. In the first nine months of 2024, it sold N7.6 trillion in OMO bills, compared to just N150 billion during the same period in 2023. This tool has been critical in mopping up excess liquidity and supporting exchange rate stability. Ayodele Akinwunmi of FSDH Merchant Bank noted that this aggressive strategy aligns with the CBN’s objectives to stabilize inflation and the naira.

The Last Hike in Sight?

While a rate increase is widely expected, analysts like Khan believe the November hike could mark the end of the current tightening cycle. “The cumulative effect of earlier tightening is likely still working its way through the economy,” she explained.

Nigeria’s economic reforms under President Bola Tinubu, including fuel subsidy removal and foreign exchange liberalization, have compounded inflation but also laid the groundwork for long-term structural improvements. Many, including the International Monetary Fund (IMF), have noted that the impact of these reforms, alongside the CBN’s monetary tightening, will be critical in shaping Nigeria’s economic trajectory in the coming years.

For consumers and businesses, the likely hike means higher borrowing costs, which could dampen investments. However, the overall effectiveness of these policies in a supply-driven inflationary environment remains a topic of debate.