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MAY 2022 MONETARY POLICY DECISION - At last, the hawks carry the day

At last, the hawks carry the day

At its third meeting of the year, the Monetary Policy Committee (MPC) raised the Monetary Policy Rate (MPR) by 150bps to 13.0%. While six members voted to raise interest rates by 150bps, four members preferred a 100bps hike, while one opted for a 50bps hike.

 

Nigeria joins other African economies like Egypt (+200bps YTD) and Ghana (+450bps YTD) in raising interest rates to curb inflation. On a comparative basis, however, Nigeria’s negative real rate of return is still above Egypt’s and South Africa’s levels. If there were no capital controls, the MPR needs to rise to 15.0% - 15.5% to match the current real rate of return in Egypt and South Africa, respectively.

The backdrop remains the same

The background underpinning this decision is similar with the last meeting – the ongoing war in Ukraine, backlash from sanctions on Russia, lockdowns in China, swift change in monetary policy stance, and risk aversion in the global financial markets.

The Ukraine-Russian war aggravated supply chain disruptions as major trade routes were closed amid sanctions on Russia. Should the war escalate, this could worsen already high food inflation, as food prices rise to levels not seen in 40 years. In our view, the resurgence of the pandemic in China could spill over to resource-dependent emerging economies in form of lower external demand and lean current account balances, while reducing demand for oil. The decline in Chinese demand is however inadequate to stop the oil bull, as oil prices sit comfortably at $114/barrel. China could decide to buy Russian crude at discounts, risking international sanctions, that could boomerang on emerging markets in form of higher imported inflation