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NIGERIA MONETARY POLICY COMMITTEE- MPC delivers another 100bps rate cut, adjusts asymmetric corridor

MPC delivers another 100bps rate cut, adjusts the asymmetric corridor MPC delivers another 100bps rate cut, adjusts the asymmetric corridor

The Monetary Policy Committee (MPC) continued its expansionary tone in rejigging the economy from a coronavirus-induced recession. The MPC reduced the Monetary Policy Rate (MPR) by 100bps to 11.5% and adjusted corridor rates to +100/-700bps around the MPR.

CBN roots for output recovery amid policy dilemma

Given the policy dilemma between supporting the receding economy and restoring price stability, the MPC decided to cut the MPR to hasten economic recovery as it noted that the upwards trend in inflation was non-monetary driven. By a split vote of six-to-four, members of the MPC voted to lower the MPR by 100bps to 11.50%. Amid inflationary pressures, weak capital and remittance flows, and low oil receipts, the MPC has utilized the firepower (i.e. the gross international reserves) at its disposal to save the economy from a looming recession. This decision was taken to support a quicker recovery from the recession.

Monetary policy room limited, wait-and-see approach expected

Given a glaring pandemic-induced recession, price instability, and weak capital flows, the Central Bank has limited capacity to curb inflation. Although recent policy parameter adjustments will boost credit to an extent due to the sustained Loan to Deposit policy rate checks, a rate cut may not translate into cheaper loans due to heightened risks in the business environment given energy reforms and ongoing exchange rate unification efforts that can crystallize forex risks. In addition, limited reserve supply and lean buffers could induce another currency adjustment, if oil prices deteriorate further due to rising cases of coronavirus. Adherence to OPEC+ production cuts and compensation for earlier oil production are further deterrents to reserve accretion.