By Kirk Leigh
The Monetary Policy Committee (MPC) raised rates once again at its second meeting of the year to 24.75 percent, just four weeks after raising it to 22.75 percent. While the domestic economic reasons for the decision are well analysed, little has been said about the global factors that gave rise to the policy decision.
The Committee noted in its February communiqué that global growth and inflation situation in developed and emerging economies; rates hikes and geopolitical shocks influenced the decision.
The MPC noted that, despite moderating inflation, most central banks maintain policy rates, underscoring their commitment to averting overheating economies. This stance impacts advanced economies, fostering capital outflows from emerging markets like Nigeria.
In the considered opinion of the MPC, global output growth is expected to hold steady at 3.1 percent in 2024, maintaining the level seen in the previous year. Projections indicate a potential improvement to 3.2 percent in 2025, bolstered by the robust performance of the United States economy, leading emerging markets, and developing economies, alongside fiscal stimulus measures in China. Despite this stability, the global economic landscape remains fraught with risks, primarily stemming from geopolitical tensions in regions such as the Middle East (Israel and Gaza) and Europe (Russia and Ukraine), with potential spill-over effects into other areas. Furthermore, climate change-related events, including floods and droughts, pose additional challenges to global economic resilience.
The Committee drew attention to the fact that inflationary pressures are showing signs of moderation across many regions, signaling early indications of a disinflationary process amid tight monetary policy stances. Global inflation is forecasted to decelerate to 5.8 percent by the end of 2024, with a further decline to 4.4 percent anticipated in 2025. However, the emergence of geopolitical shocks , such as the Israel-Gaza conflict and disruptions in the Red Sea, could lead to new episodes of commodity price spikes, prolonging tight monetary conditions worldwide.
It also noted that while global growth remains stable, concerns persist regarding inflation levels, particularly in advanced economies where rates continue to exceed central bank targets. This situation has prompted continued tight financial conditions, potentially leading to capital outflows from emerging markets and developing economies. The Nigerian domestic economy, in particular, faces significant risks due to these tight financial conditions, which may exert pressure on the exchange rate through capital outflow.
The Committee submitted that to address these challenges, a tightening approach was an imperative, emphasizing the importance of coordinated efforts between fiscal and monetary authorities to restore macroeconomic stability.
Additionally, it noted that amidst geopolitical uncertainties and inflationary pressures, the global economy continues to navigate a complex landscape. While stability in growth is observed, vigilance and coordinated policy responses are essential to mitigate risks and sustain economic resilience in the face of evolving geopolitical dynamics and inflationary trends.
Given these conditions, the Committee voted unanimously to raise rates to its current level. Hopefully, the effects of the rate hike, which is to temper inflation, will begin to bear fruit.
Kirk Leigh is the Publisher of Abuja Politico
kirklawn2@outlook.com
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