July 23, 2019/Cordros Report

To tackle the slow pace of output growth, which remains a long way off the pre-recession periods of 2015, the monetary policy committee switched its policy dogma, from the hawkishness of the last four years, to a dovish stance by cutting benchmark rates by 50bps in its March 2019 policy meeting. Even as rates were held steady in May, the committee shifted towards a more dovish stance, emphasizing the need to pursue policies that would boost economic activities. In his annotations, the central bank governor unequivocally stated that policies henceforth must address (1) access to credit, (2) job creation, and (3) economic diversification.

With access to credit in mind, such a statement is quite understandable, given that Nigerian banks have almost shifted from the traditional banking model to an unconventional method of boosting interest income. To address this concern, the apex bank, within 7 days, delivered two circulars to the commercial banks. Whether it is a love letter or a letter bomb, the answer depends on which side of the divide you are on. However, what we do know is that the letter is intended to induce DMBs to direct lending to specified sectors, an endorsement of a continued accommodative stance, in our opinion.

As the MPC begins its two-day policy meeting today, the CBN’s recent policy moves highlighted above already point towards a rate cut, almost to the point where it appears to be a forgone conclusion. More so, beyond a tamer inflationary expectation and stable FX market, both of which provide exceptional cases for a rate cut, the global environment further supports such a move. The concern for us, however, is that Nigeria’s MPR may have lost its signalling effect   as we fail to see how a rate cut will spur credit creation, and subsequently, drive economic growth. Thus, a rate cut in this circumstance is either undirected or unnecessary, just as it was in March. Instead, we would expect to see more policies on the issue of credit reforms, which the last MPC minutes stated were in the pipeline. For us, that will be of more value.

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