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MONETARY POLICY DECISION - CBN leaves rates unchanged for the umpteenth time

In its first meeting of the year, Nigeria refused to join its African counterparts in raising its Monetary Policy Rate (MPR). Angola, Ghana, and South Africa raised interest rates in 2021 to surmount biting inflationary pressures. Kenya and Nigeria, on the other hand, left their benchmark rates constant to support recovery.

 

Current Monetary Policy Variables
Instrument	Current Rate	Since	Previous Rate
Monetary Policy Rate	11.50%	22-Sep-20	12.50%
Cash Reserve Ratio	27.50%	24-Jan-20	22.50%
Liquidity Ratio	30.00%	08-Sep-08	40.00%
Asymmetric Corridor	1% - 7%	22-Sep-20	2% - 5%

 

Source: CBN, Vetiva Research

MPC: Nigeria is less exposed to monetary policy normalization risks

With inflation hitting new historic highs in advanced economies (US – highest since 1982, UK – highest since 2010, Euro area – highest since the ECB was created), the commencement of monetary policy normalization by the US Fed has been the most anticipated event in recent times. As foreign portfolio flows exit riskier asset classes, emerging economies raise interest rates to prevent capital flight and curb inflationary pressures. In Nigeria’s case, the CBN Governor noted that Nigeria was not one of the emerging economies that benefited from the liquidity glut of 2020. On the contrary, foreign portfolio investors were net-sellers of Naira assets during the same timeframe. Thus, the country, in the CBN’S view, could be less exposed to risk-off sentiments.

 

Given this backdrop, the apex bank believes it is not under pressure to raise interest rates. However, the bank confirmed that tightening could be carried out through Cash Reserve Ratio and other discretionary powers at its disposal. In addition, the Committee noted that unlike advanced economies, which are faced with inflationary pressures, the apex bank has a twin target of output growth and price stability.

 

As Purchasing Managers Index surveys point to a rebound in economic activities, the apex bank believes the ongoing accommodative stance could support growth and surmount inflation. Alluding to the surprise in Dec’21 inflation numbers, the apex bank regarded the uptick in both food and core inflation as temporary, driven by festive demand. However, it acknowledged hoarding activities and logistical challenges in moving food from farm to market as drivers of inflationary pressures. According to the Governor, 50,000 tons of maize was released from its agricultural reserves to tame price growth between February and August 2021. In the coming months, the apex bank seeks to explore relationships with rice millers to ensure adequate access to inputs (paddy rice). In addition, the inauguration of the board of the Nigeria Commodity Exchange is in the works. These, in our view, could help in curbing the notable upside risk to headline inflation in 2022 – food insecurity.