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The Central Bank of Nigeria (CBN)’s Monetary Policy Committee (MPC) may face a tricky decision regarding whether to hold or raise the benchmark interest rate in view of the recent petrol price hikes.

With inflation slowing for the second straight time to 32.15 percent in August 2024, analysts had projected that the committee might consider cutting rates to stimulate economic activities. However, the recent hikes in petrol prices have introduced a new challenge, leaving the MPC at a crossroads, analysts said.

Nigeria’s inflation rate dropped to 32.15 percent in August 2024 from 33.40 percent in July 2024, data from the National Bureau of statistics (NBS) showed.

On Monday, the Nigerian National Petroleum Company (NNPC) Limited raised petrol prices by 11 percent, marking the second hike in two weeks. The adjustment came just a day after the company began sourcing fuel from the Dangote Oil Refinery located in the outskirts of Lagos.

The price of gasoline was increased from N858 ($0.53) per litre to N950 in Lagos, and up to N1,019 in the northeastern states.

The NNPC disclosed that it purchased the product from the refinery at N898 per litre, though this was disputed by Dangote refinery.

In a matter of weeks, a litre of petrol has jumped from N617 to between N950 and N1,019 in Nigeria, reflecting over 50 percent increase.

Analysts polled by BusinessDay opined that the conflicting trends present a unique dilemma for the policy decision-making body of the apex bank.

On one hand, the slowing inflation could allow room for a rate cut to ease financial conditions and boost economic growth. On the other hand, rising petrol prices could trigger another wave of inflation, potentially undermining the benefits of any rate reduction.

The analysts suggest that the MPC will have to weigh both scenarios carefully. Cutting rates prematurely, in the context of rising fuel prices, might lead to a resurgence in inflation, further complicating Nigeria’s economic recovery.

The MPC will meet next week – from September 23 to 24, 2024, – as announced by the CBN on its website on Wednesday. The meeting is highly anticipated, as market players, businesses, and consumers await the outcome of these critical policy deliberations.

Tilewa Adebajo, chief executive officer, The CFG Advisory, does not expect any rate cut at this time, saying, “Fuel price increase will directly impact inflation so it leaves MPC in a dilemma.”

Ayodele Akinwunmi, senior relationship manager, Corporate Banking Group, FSDH Merchant Bank, said it is good news that inflation dropped for two consecutive months but it may not still justify a change in monetary policy stance for two reasons.

One, the inflation rate at 32.15 percent is still very high. Changing monetary policy stance may be too soon. Two, there is a high tendency that the inflation number will reverse the trend and start an upward movement from September 2024 because of the adjustment of petrol pump price across the country.

“So it is not yet time to celebrate,” he said.

According to Ayokunle Olubunmi, head of financial institutions ratings at Agusto Consulting, “The hike in fuel price has changed the dynamics as we expect the impact to further intensify inflationary pressures. I think the best case scenario is to hold rates.”

Read also: Nigeria’s long battle against inflation continues as MPC decides

Ayodeji Ebo, managing director/CBO, Optimus by Afrinvest, said the recent moderation in the inflation rate can be largely attributed to base effect and not necessarily decline in prices of goods & services.

“While we have seen a reduction in the month-on-month inflation, at 2.2 percent in August, this is relatively high when annualised.”

He said there is a need for the MPC to allow some time and establish a trend before any rate cut.

“Fixed income rates have declined in the last few weeks which is positive for corporate issuances. Hence, we expect the MPC will hold rates constant at the next meeting,” Ebo said.

For analysts at Coronation Merchant Bank Limited, “Given the recent inflation trajectory, we anticipate that the Monetary Policy Committee will likely maintain the benchmark policy rate at 26.75 percent in its next meeting which is scheduled to hold on 23rd and 24th of September, 2024.

“Looking ahead, inflation remains elevated, likely above 30 percent in 2024.”

Analysts at FBNQuest said, “The MPC is scheduled to meet next month. We expect that the committee will likely pause its rate tightening cycle to evaluate the economic impact of the previous rate hikes.”

However, Ike Ibeabuchi, a markets analyst, said though the MPC will likely hold rates, they may raise rates slightly in anticipation of the imminent inflation hike.

At the 296th meeting of the MPC in July, the committee increased the policy rate by 50 basis points, bringing it to 26.75 percent. Additionally, the MPC revised the asymmetric corridor around the Monetary Policy Rate (MPR) to +500/-100 basis points, up from +100/-300 basis points, while keeping all other parameters unchanged.

This adjustment has led to the lifting of the suspension on the Standing Lending Facility (SLF), allowing authorised dealers to access the facility within the specified operating hours of 5pm. to 6.30pm via the Scripless Securities Settlement System (S4).