Post–MPC

The Monetary Policy Committee – “The Committee” or “The MPC” – of the CBN concluded its second meeting for the year today against the backdrop of recent domestic economic developments – rising inflation and slowing economic growth – and external economic headwinds such as tepid global growth as well as stable energy prices.

The Committee decided by a majority to reverse its accommodative monetary stance and commence another tightening of monetary policy in the country. Specifically, the Committee increased its benchmark rate from 11.0% to 12.0% and hiked CRR (Cash Reserve Ratio) for banks to 22.5% from 20.0%.

The decision of the Committee was hinged on the need to:

• Combat rising inflationary pressures
• Reduce banking system liquidity
• Attract foreign inflow and invariably support the slide in the nation’s currency

The forgoing implies that monetary authority is now interested in pursuing price stability as a policy objective, which it traded for economic growth at its September 2015 meeting.

In our view, the outcome of the MPC has the following impacts on the Nigerian economy.

• First, we expect an increase money market rates on the back of the squeeze in banking system liquidity. This should translate to a higher cost of funds for financial institutions and could further pressure net interest margin
• Increase cost of fund implies a possible rise in the cost of credit in the economy for borrowers. This does not particularly augur well for the Industrial sector of the Nigerian economy which is already in recession
• Also, increase MPR translates to a rise in nominal Savings interest rate to 3.6% from 3.3%. this remains unattractive given current inflation rate of 11.4% which implies a real returns of -7.8% on Savings account
• Finally, tightening at this point could provide some form of stability in the FX market in the coming months as reduced naira liquidity would likely cushion demand for the dollar

Our thoughts

• The decision of the MPC to tighten monetary policy portrays conflicting signals as to the true direction of monetary policy in the Nigerian economy, which could further worsen the perceived economic uncertainty in the country
• That said, we believe the decision to hike MPR and CRR would go a long way to moderate liquidity in the economy in anticipation of the spending stimulus from the federal government which is expected to commence next week, other things being equal
• We however doubt that the move by the MPC would attract foreign inflows or stem inflationary pressures. As for the latter, the key driver for the sharp rise in prices was structural bottlenecks in the economy; while uncertainty around the value of the naira is the primary reason for the current shortage of foreign inflows into the country
• Thus, until a proper guidance is provided on the nation’s FX policy guidelines, we expect investors to continue their “wait and look” stance on the Nigerian economy