As the financial markets anticipate the release of Nigeria’s inflation report for December 2024, there is a growing discourse on how this data may shape the Central Bank of Nigeria’s (CBN) policy direction at the forthcoming Monetary Policy Committee (MPC) meeting (scheduled for 27th and 28th of January 2025). Given the delicate state of the economy, the MPC’s decision—whether to hold or increase the Monetary Policy Rate (MPR)—will as usual be influenced by inflationary pressures, currency stability, and fiscal policy alignment with macroeconomic goals.
The decision by the National Bureau of Statistics (NBS) to rebase the Gross Domestic Product (GDP) and Consumer Price Index (CPI) is a significant statistical exercise that has important implications for the Nigerian economy and financial markets. Rebasing involves updating the base year used for measuring GDP and CPI to better reflect the current structure of the economy and price movements. The rebasing process ensures that key economic indicators remain accurate and relevant for policy formulation, investment decisions, and economic analysis.
In the week under review, the Naira traded at a high of $/₦1,551.00 on Tuesday and a low of $/₦1,530.00 on Monday. The week closed at $/₦1,544.50 on Friday. The interbank money market closed the week with a liquidity surplus of over ₦340 billion while O/N and OPR closed at 27.86% and 27.29%, respectively. The T-Bill market traded with a bullish bias throughout the week supported by a significant yield decline at the NTB auction. The impact of bulls was, however, not felt in the bond space as market stakeholders were somewhat lethargic.
There has been a consistent pattern in CBN’s approach to conducting Open Market Operations (OMO) auctions. Specifically, the CBN has maintained a practice of allotting precisely the amount offered, irrespective of the level of demand in the market. In recent auctions, subscription volumes have hovered around the ₦1 trillion threshold At the OMO auction conducted on the 7th of January, CBN allotted the exact amount (₦500 billion) initially offered.
The substantial oversubscription at recent OMO auctions reflects a robust demand for government securities, largely driven by the high yields on offer and the relatively low-risk profile of such instruments. This strategy appears to yield results, as evidenced by the recent declines in stop rates for various tenors. In the preceding auction, the 358-day tenor closed at 23.9300%, while the 365-day tenor closed at 23.9500%. However, in the most recent auction, the 350-day tenor closed at 23.8100%, while the 364-day tenor closed at 23.8400%, representing a decline of 12 basis points and 11 basis points, respectively.
Analysts believe that the CBN’s approach serves multiple purposes; first, it helps to moderate the government’s borrowing costs. Given the high-interest rate environment, issuing more debt at elevated yields would only worsen the fiscal burden in terms of interest payments. By limiting allotments and encouraging competitive bidding, the DMO can drive down yields over time, thereby reducing the cost of borrowing. Second, this strategy plays a role in liquidity management; with the Nigerian economy facing significant inflationary pressures, excessive liquidity in the system could further exacerbate the situation. By controlling the amount of liquidity absorbed through OMO auctions, the DMO indirectly supports the Central Bank of Nigeria’s (CBN) broader monetary policy objectives, which include stabilising the Naira and controlling inflation.
TENOR | AUCTION DATE | OFFER (₦’ B) | BIDS (₦’ B) | RANGE OF BIDS (%) | STOP RATES (%) | PREVIOUS STOP RATES (%) | TOTAL SALE (₦’ B) |
350-DAY | 07-01-2025 | 250.00 | 287.50 | 23.7500-23.9200 | 23.8100 | 23.9300 | 150.00 |
364-DAY | 07-01-2025 | 250.00 | 1,272.03 | 23.7900-23.8900 | 23.8400 | 23.9500 | 350.00 |
At the end of the first Nigerian Treasury Bills (NTBs) auction for the year, DMO seemed to have followed CBN’s posture to prudence issuance. Despite total subscriptions exceeding ₦1.5 trillion, a clear indication of robust demand, the DMO allotted exactly ₦515 billion, the initial size offered.
The 364-day bill, as expected, was the focal point of investor interest, receiving an excess allotment of over ₦80 billion in addition to the initial offer of ₦385 billion. Interestingly, while the stop rates for the 91-day and 182-day tenors appear unchanged, the 364-day tenor has experienced slight declines in recent auctions. At the most recent auction, the 364-day stop rate declined by 18 basis points, from 22.8000% to 22.6200%, suggesting a strategic effort by the DMO to gradually lower yields on longer-term securities in response to robust demand while ensuring that short-term rates remain stable.
In recent months, the DMO has made a concerted effort to balance its financing needs with the objective of maintaining yield stability, especially in light of mounting fiscal pressures. The overwhelming subscription figures, which reached over ₦1.5 trillion, reflect the prevailing high liquidity in the system and the continued attractiveness of risk-free government instruments. However, while the DMO’s strategy appears effective in the short term, sustaining this approach may become more challenging as broader economic conditions evolve. A key concern remains the trajectory of inflation. Investors may demand higher yields as compensation when inflationary pressures persist or intensify.
AUCTION DATE | 08-01-2025 | 08-01-2025 | 08-01-2025 |
ALLOTMENT DATE | 09-01-2025 | 09-01-2025 | 09-01-2025 |
MATURITY DATE | 10-04-2025 | 10-07-2025 | 08-01-2025 |
TENOR | 91-DAY | 182-DAY | 364-DAY |
OFFER (₦) | 50,000,000,000 | 80,000,000,000 | 385,000,000,000 |
SUBSCRIPTION (₦) | 22,944,870,000 | 20,818,272,000 | 1,476,169,435,000 |
ALLOTMENT (₦) | 21,304,869,000 | 20,488,272,000 | 473,206,859,000 |
STOP RATES (%) | 18.0000 | 18.5000 | 22.6200 |
PREVIOUS STOP RATES (%) | 18.0000 | 18.5000 | 22.8000 |
With inflation figures expected to be released on Wednesday—ceteris paribus—it is no doubt that inflation has remained a key concern for policymakers, businesses, and households alike. Recall that inflation has been projected to reach 15% by the end of 2025; however, the expected inflation rate as of December 2024 will offer critical insights into the performance of the current policies and provide insights on whether such policies are yielding their desired outcomes. A lower-than-expected inflation rate may signal that existing measures—such as tightening monetary policy—are effective, possibly prompting the MPC to consider holding the MPR. Conversely, where inflation accelerates or remains stubbornly high, the MPC could be pressured to hike rates further to rein in excess liquidity.
However, one must acknowledge the trade-offs associated with interest rate hikes. While effective in curbing inflation, higher interest rates tend to stifle economic growth and investment, potentially slowing economic expansion. Nigeria’s economic environment, which appears to be characterised by weak consumer spending and sluggish growth output, requires a delicate balancing act.
The decision to rebase the country’s GDP to its 2019 figure means that the NBS will use 2019 as the new reference year for calculating the value of goods and services produced in the economy. This update is necessary because economic structures evolve due to technological changes, production patterns, and consumer preferences. By adopting a more recent base year, the NBS will capture sectors that have grown significantly or emerged since the previous base year, such as information technology, digital services, and renewable energy.
On the other hand, rebasing the CPI to 2024 is equally important, as it ensures that the inflation rate accurately reflects current consumption patterns. The CPI measures changes in the prices of a basket of goods and services consumed by households, and this basket needs to be updated periodically to remain relevant. Over time, the relative importance of certain goods and services appears to have changed due to shifts in consumer behaviour, technological advancement, and lifestyle changes.
Notably, a rebased CPI can affect monetary policy decisions. Inflation targeting is a key objective of the Central Bank of Nigeria (CBN), and an updated CPI will give policymakers a clearer view of price stability. Where the rebased CPI shows that inflation is lower than previously reported, the CBN may have more room to adopt an accommodative monetary stance, potentially lowering interest rates to stimulate economic growth. Conversely, where the rebased CPI reveals higher inflation, the CBN may be compelled to maintain or tighten its current monetary policy to rein in price pressures.
Regarding financial markets, the rebasing exercises could increase activity and optimism. The equities market, in particular, could benefit from increased investor interest in sectors that contribute significantly to the rebased GDP. However, there are potential downsides, such as the rebased GDP revealing a large informal sector, which may signal structural issues requiring policy attention. Similarly, a rebased CPI showing persistently high inflation could deter investors, especially in the fixed-income space, where actual returns matter.
The CBN is expected to cement its aggressive efforts to curb inflation by further tightening, albeit with caution. A decision to hold or reduce parameters at this juncture would be misplaced considering the higher interest rates recorded globally in recent weeks. CBN must be seen to consolidate its position by guarding against any negative wave.
As global markets await Donald Trump’s assumption to office, we expect equities and cryptocurrencies to trade sideways in the interim.
In Nigeria, with the NBS’s plan to rebase the GDP to 2019 and the CPI to 2024, some think of it as a positive development that enhances the credibility and accuracy of Nigeria’s economic statistics. This move will provide a clearer picture of the economy’s structure, aiding policymakers, investors, and analysts in making better-informed decisions. While the immediate impact on financial markets is likely to be positive, the long-term effects will depend on how the government and the CBN respond to the insights provided by the rebased data. By adopting appropriate fiscal and monetary policies, Nigeria can leverage this updated data to attract investment, stimulate growth, and promote macroeconomic stability.
