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NSR H1 2021 Excerpts - Monetary Policy - Prioritizing Economic Growth

Nigeria Strategy Report – H1 2021 Excerpts

 Domestic Economy and Markets

• In this morning’s cut-out of our core strategy document – The Nigeria Strategy Report, we focus on developments in the monetary space over H2 20 and delineate our outlook for monetary policy direction for 2021.
• The Monetary policy authorities in H2:2020 maintained its accommodative stance, as it considered the lingering impacts of the twin shocks of the COVID-19 pandemic and low oil prices on the Nigerian economy. Inflationary pressures stemming from the prevalence of insecurity in the nation’s food producing states, hike in the price of petroleum products, and adjustments in exchange rates tilted the Monetary Policy Committee (MPC) to stand with its pro-growth viewpoint. Consequently, benchmark rates were adjusted in the second half of 2020, as MPR in September was cut to 11.50% (vs. 12.50% at the end of H1:2020), and Asymmetric corridor was adjusted to +100/700bps (vs. +200bps/-500bps at the end of H1:2020).
• Inflation is poised to maintain its upward trend in the near term. Prevailing factors such as insecurity in food producing nations and higher energy costs are expected to contributor to the rising inflation. Considering this, we do not see the MPC lower interest rates further, as it could stifle achieving non-inflationary economic growth. We do however expect the MPC will maintain its accommodative stance to support the growth and recovery of the domestic economy. The apex bank’s pro-growth attitude should see increased sector-targeted interventions and encourage lending to the real sector. Considering this, we see yields remaining low and negative real rates of return widening, as authorities encourage cheap credit to lift the economy out of its depressed state.
• We anticipate total maturity of N14.84 trillion in 2021 from Bonds, T-bills and OMO. However, we expect that the CBN continues to manage the expected money supply via CRR debits on the apex bank’s disposition. On the back of this, we expect effective CRR to remain high in 2021. At the OMO auctions in 2021, we envisage that the low stop rates would be sustained. We expect the CBN will seek to maintain a lower cost in managing liquidity, especially as expected inflows World Bank and would give more headroom to maintain low rates.