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Monetary Policy Decision - MPC braves inflation headwinds with HOLD call

MPC braves inflation headwinds with HOLD call                                                                             

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) voted to retain all monetary policy levers at their previous levels. Specifically, seven out of ten members voted to maintain the monetary policy rate (MPR) at 14% albeit with three of these seven opting to increase the cash reserve ratio (CRR) from 22.5% to 24.0%. Meanwhile, the three dissenting committee members moved to increase the MPR by 25bps. The decision tallies with our expectations in two ways as we had predicted a “HOLD” decision and also suggested the MPC would tilt even further towards a rate hike, which played out in the fact that some members also voted for an increase in the CRR. We note that the focus on the CRR indicates the committee’s worries over excess system liquidity ahead of the 2019 elections. Moreover, the CBN may be more open to raising the CRR as its Real Sector Support Facility gives it the flexibility to remit banks’ CRR funds to those that lend to the real sectors.                                    

Noting the reasons for their final decision, the CBN Governor highlighted that while tightening may bolster price and exchange rate stability, it would impact on economic growth and financial system stability. Furthermore, the Governor expressed cautious optimism over the near-term trend of external reserves amid strong oil prices and stable production—which would be crucial as Nigeria tries to weather the storm of U.S. monetary tightening. Overall, we believe that the focus of Nigeria’s monetary policy remains the same—how to moderate volatile inflation in a low-growth economy—and maintaining the status quo remains the most prudent choice.                                                                   

We consider this September decision to be a pivotal one and note that it is now very unlikely that the CBN would alter its policy path before the 2019 elections as the expected rise in inflation and capital outflows have been factored into this HOLD decision. Thus, unless we observe a material change in price or exchange rate stability, we expect the monetary policy status quo to remain until March 2019 at the very least.