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Monetary Policy Review - All monetary parameters left unchanged

All monetary parameters left unchanged

• At its meeting on the 23rd November 2020, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) decided to keep monetary policy rate unchanged at 11.50%. The decision was in line with market expectations after we saw a 100 basis-point cut each both at its May and September 2020 meetings. All committee members unanimously backed the decision to retain the monetary policy rate. In addition, all other monetary policy parameters were left unchanged. Thus, the asymmetric corridor remained at plus 100 and minus 700 basis points around the monetary policy rates; liquidity ratio at 30.00%; and the cash reserve ratio at 27.50%.
• The decision reflected the MPC’s position to adopt a wait and see approach considering the sizable cut on borrowing cost delivered over the course of the year, which would require time to fully work through the economy. Furthermore, the committee may have also considered the vast array of liquidity buffers it has deployed over the past months to various sectors of the economy to cushion the impact of covid-19 virus on economic performance, thus, deciding to place a hold on further cuts. Buttressing this standpoint is the gradual but slow recovery in economic activities as indicated by the PMI numbers which averaged 46.7pts in Q3’20 vs 42.2pts in Q2’20. Also, the milder contraction in GDP numbers in Q3’20 gives a level of comfort that the economy may continue to recover on the strength of past accommodative decisions taken by the committee over the course of the year.
• Similarly, the continued northward trend in consumer prices may have also prevented the committee from further deepening its accommodative stance. The recently released October inflation report showed headline numbers rising by 14.23% YoY; the ninth-consecutive increase since the start of the year. Inflation over the course of the year has averaged 12.79%, 150bps higher than its comparable period in 2019. This has been largely driven by flooding and pockets of conflicts in food producing states, supply chain disruption owing to lockdown measures embarked upon to curtail the spread of the covid-19 virus, higher energy prices as well as illiquidity in the FX space, which has seen the CBN devalue the Naira in the official window by 24% YTD.
• Looking ahead, we expect the CBN to continue to explore direct measures such as the use of its development finance programme to intervene in real sector activities. Our view is premised on the near-term outlook for inflationary and exchange rate pressure, which is expected to continue to trend northwards