January 27, 2020/Cordros Report

In a period where growth concerns seem to be on the front burner, we had expected that the outcome of the latest MPC meeting, vis-à-vis policy direction, would have been expansionary. This is despite the renewed inflationary pressure. However, the MPC sprang a hawkish surprise on the market, as 9 out of the 11 members of the committee elected to adjust the Cash Reserve Ratio (CRR) upwards by 500bps to 27.5% – a move last witnessed in March 2016. Meanwhile, the committee kept all other policy parameters constant – MPR at 13.5%; asymmetric corridor around the MPR at +200bps/-500bps; liquidity ratio at 30.0%.

How Justified is the Hawkish Turn?

After stating clearly that the primary driver of recent inflationary pressures is a structural one that requires fiscal rather than monetary intervention, we fail to see how a CRR hike will reduce the “price of rice” in the market. Beyond the obvious, the 500bps hike in the CRR will sterilize between NGN1.00 to NGN1.50 trillion in liquidity from the system, further raising questions about the seriousness of the apex bank’s policy actions towards driving credit extension to the private sector.

Credit Growth Looks Set to Be the Sacrificial Lamb

With c.NGN7.16 trillion worth of OMO bills maturing in H1-2020, of which c.26.0% will no longer participate in the OMO market due to restrictions on local non-bank investors, we suspect the committee hopes to curtail any speculative pressures that may result from these maturities. However, aside from the value of a timely response to impending currency market pressures, which should potentially dampen any premature expectations for a sudden devaluation, we see little benefits to the CRR hike. Instead, its credit growth mandate will now take a backseat until the end of the elevated maturity cycle, after which the MPC will be forced to make a U-turn towards the previous dovish stance in our opinion. 

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