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Monetary Policy Decision - MPC holds rates, but three members vote to hike

MPC holds rates, but three members vote to hike                                                                          

Two years after its decision to raise the monetary policy rate (MPR) from 12% to 14% in July 2016, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) voted to hold the MPR at 14% and retain all other monetary tools—cash reserve ratio at 22.5%, liquidity ratio at 30%, and asymmetric corridor at +2%/-5%. Drilling down, seven MPC members voted to retain the MPR at 14%, two members opted for a 50bps hike, and one member voted to increase MPR by 25bps.                                                                          

Although the decision is in line with our expectations, the MPC struck a somewhat hawkish chord amid bearish domestic and external developments. Firstly, although annual inflation moderated further in June (from 11.6% to 11.2%), consumer price pressure is intensifying in monthly terms (m/m inflation rose from 1.1% in May to 1.2% in June). Secondly, United States (U.S.) monetary policy has turned more hawkish in recent months, with the Federal Reserve (Fed) raising its interest rates outlook for the rest of the year. Coupled with simmering trade tensions, the risk of capital flight from emerging markets is materially greater. Amid this, tight monetary policy is required to ensure price and exchange rate stability.                                                                             

Despite the case for tight monetary policy, the majority vote settled on a “HOLD” decision, and we consider this to be the most prudent choice. We deem the current 14% MPR as sufficient to rein in inflationary pressures, noting that current annual inflation of 11.2% y/y is still substantially lower than MPR and our estimates project year-end inflation of 12.7% y/y, still below the MPR. In addition, further tightening may damage an already frail economy, particularly as debt burdens and borrowing costs are still prohibitively high.                                                                        

"It is safe to say that the easing agenda is off for 2018, but we also do not anticipate a rate hike anytime soon. Inflation is unlikely to rise substantially at the end of the year, and external factors such as U.S. monetary policy are relatively predictable in the near-term. As such, we recommend that the MPC maintains the status quo for the rest of the year and focus on driving initiatives to boost Nigeria’s retail credit framework.