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Nigeria MPC: At last Nigeria to adopt flexible exchange rate

• ​ At the third MPC meeting of 2016, the Monetary Policy Committee (MPC) unanimously decided to adopt a flexible exchange rate as widely speculated by markets. However, contrary to market expectation of a hike in the benchmark interest rate, the MPC decided to retain all policy rates - the MPR maintained at 12%, the asymmetric corridor retained at +2% and -5%, the Cash Reserve Requirement (CRR) of banks retained at 22.5% and Liquidity Ratio maintained at 30%. In response to the challenges faced by the Nigerian economy (output contraction, rising inflation and high unemployment), the MPC appears to have favored growth over price stability with the CBN Governor noting that the balance of risk is now tilted against growth - reflecting a change in policy direction from the March meeting. The Governor further announced that the CBN will maintain a window for “critical” transactions in raw material and machinery imports targeted at boosting local production. We note that the establishment of the two-tier market creates room for arbitrage. Hence, we would expect the CBN to keep a tight noose on access to the “critical” window to curb such profiteering. 
• Following from these decisions, we expect the inflation picture to worsen in the near term as a result of the pass through of a new exchange rate to consumer prices. We expect a knee-jerk reaction to push equity and fixed income markets higher in the coming sessions pending the unveiling of the new framework by the CBN. Any sustainability thereafter would be determined by how markets assess the new framework and its prospects of improving FX liquidity. Overall, we view this development as positive for Nigeria.