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Monetary Policy Decision - MPC opts for no rate change in bid to “do no harm”

In line with our expectation, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) opted to retain all monetary policy tools at previous levels at its third meeting of the year. This strategy of non-maleficence is based on the view that even as broader macroeconomic conditions look to be improving, fundamental economic weaknesses such as inflation remain a real threat.

The CBN Governor pointed to the steady improvement in foreign exchange (FX) market liquidity as a result of persistent dollar injections by the CBN, as well as improvement in confidence from the opening of the “Investors & Exporters” FX window. According to the Governor, FX inflows into the country (through the CBN) grew 70% m/m in April and outpaced the growth in outflows during the same period. The improved FX situation has positively impacted domestic prices as imported inflation continues to trend downwards.

Sometimes, the best policymakers can hope for is to “do no harm” and we believe the MPC has made the right call in this situation. The CBN Governor reiterated his commitment to boosting liquidity in the FX market and we expect this to support Nigeria’s economic recovery and ease some pricing pressures. Looking ahead to the July meeting, the outcome of the OPEC meeting and the success of any deal struck at that time would be key. Though production volumes are of greater importance in this low oil price era, an extension of the OPEC output cut (and Nigeria’s continued exemption) would be positive for investor confidence and policy clarity. In addition, fiscal performance and June inflation (Vetiva forecast: 15.2%) would also be considered at that time. However, we do not envisage a meaningfully different choice set for the MPC at the next meeting and expect monetary policy levers to remain unchanged at that time.