Inflation Drop: Will The MPC Cut Rate Or Hold?

With the consistent drop in inflation rate, some analysts believe it is high time the Monetary Policy Rate is cut to bring down interest rates. But others believe that the rate should be on hold to lure foreign investors.
The Monetary Policy Committee (MPC) will hold its last meeting for the year on November 20 and 21, to consider possible rate-setting choices in view of recent developments and outlook of the Nigerian economy.
In its previous meeting, the Committee considered the options of tightening, loosening or maintaining the status quo. In the upcoming meeting, we believe the policy choices will now be limited to two – hold or cut rates.
Between the last MPC meeting and now, there have been appreciable improvements in the macro backdrop.
This has further raised the prospects of a sustained economic recovery. The rally in crude oil prices is the most notable, with attendant accretion to the external reserves supported by significant FX inflows.
The consistent decline in year-on-year (y/y) inflation, as well as moderation in the month-on-month movement, are other positive trends that the MPC is likely to cheer, even if the y/y decline has been marginal, keeping real rate in the negative territory.
Most recently, we have seen a market-induced correction in interest rates, which we expect the MPC to interpret rightly as an offshoot of stability in FX, better portfolio inflows, expected reduction in domestic borrowing and the general improvement in the macroeconomy.
Against the backdrop of still high inflation, a possible rate hike by the Fed, and the need to consolidate on recent gains in the economy, the MPC is likely to keep rates unchanged next week.

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