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NIGERIA JULY MPC - CBN raises MPR in pursuit of price stability

​ At the pivotal Monetary Policy Committee (MPC) meeting of 2016, the MPC voted to raise the benchmark interest rate - the Monetary Policy Rate (MPR) - by 200bps to 14%. Five members of the Committee voted in favor of the rake hike whilst three members voted in favor of the status quo. The MPC unanimously agreed to maintain all other variables – the Cash Reserve Requirement (CRR) at 22.5%, the Liquidity Ratio (LR) at 30%, and the asymmetric corridor at +2% and -5%. The decision to increase the MPR came as a surprise to analysts (10 of 15 economists in a Bloomberg survey forecasted no change in the benchmark rate) as the MPC acted decisively in the wake of emergent stagflation. The decision was taken in an effort to reverse the trend of negative real interest rates and support the embryonic flexible exchange rate regime whilst reaffirming the CBN focus on price stability. With monetary policy focused on price stability and an expected fiscal lag from government expenditure, the outlook for growth in 2016 is negative. The CBN has put all its eggs in the price stability basket, an indication that it remains uncomfortable with inflation significantly above the target band, and has the will to tackle it. However, a continued rise in inflation even in the wake of monetary tightening would dampen confidence in the MPC to use tools at its disposal to achieve price stability in the medium term. In summary, we do not expect this single policy decision to significantly alter prevailing market sentiment and as such, expect to see another rate hike in subsequent MPC meetings.