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MONETARY POLICY DECISION - Nigeria delivers a surprise 100bps rate hike

Recently, the Monetary Policy Committee (MPC) voted to raise the Monetary Policy Rate (MPR) by 100bps to 14.0%. This is the first time interest rates will be raised in two successive MPC meetings under Godwin Emefiele. While the decision to raise rates was unanimous, 6 of the 11 members present, opted for a 100bps hike. 

The hawkish momentum continues

The world continues to battle skyrocketing inflation, worsened by the war in Ukraine and sanctions on Russia. While advanced economies battle inflation, policymakers are wary of pushing the economy into a recession (especially after the US recorded an output decline in Q1’22). The high level of inflation justifies further aggressive monetary policy tightening from developed countries, as the European Central Bank’s first-rate hike and the US Fed’s 7bps rate hike loom. These hawkish decisions could heighten the pace of capital flow reversals in emerging economies, as investors rotate out of gold and equities into fixed income investments, to take advantage of the higher yield environment.

On the domestic front, the Committee highlighted the likelihood of subdued output growth, stemming from the ongoing war and high oil prices, Nigeria’s net-oil importing status, and aggressive normalization of advanced economies.

The sustained surge in domestic inflation remained of primary concern to the Committee. Although the Committee recognized that inflation was driven by both demand and supply-side approaches, we note that the current inflationary surge is majorly driven by the scarcity of PMS, which is outside the purview of the apex bank. We note that despite the 90bps inflationary surge in Apr’22 that spurred the initial rate hike in May, the surge in inflation has averaged 89bps in succeeding months (May’22: +89bps, June’22; +88bps). This partly reflects the ineffectiveness of monetary policy tools in handling the current inflationary surge. In subtle acknowledgement of the weak transmission of the earlier rate hike, the CBN called on the Federal Government to strike a balance between the pricing and supply of PMS. In our view, this has been partly addressed by the covert approval of a PMS price adjustment to a band of ₦170/litre to ₦180/litre. Nevertheless, headline inflation could still trend upwards in the near term, as high PMS prices passthrough to food prices.