January 26, 2022/CardinalStone Research
In line with our expectation, the Monetary Policy Committee (MPC) of the CBN voted unanimously to retain the benchmark Monetary Policy Rate (MPR) at 11.5%, the asymmetric corridor around the MPR at +100bps/- 700bps, Cash Reserve Requirement (CRR) at 27.5%, and liquidity ratio at 30.0%.
In our view, the decision seems reasonable, as hiking rates would likely constrain credit creation, while a rate cut is likely to intensify inflationary pressures and amplify the currency risk. The CBN indicated that the inflationary pressure witnessed in December 2021 is expected to be temporary, as the uptick reflects festive induced demand. This is in line with our house view, and we expect average inflation to moderate to 14.1% in 2022 from 17.0% recorded in 2021.
Elsewhere, the CBN downplayed the possibility of significant capital flight resulting from rate hikes in advanced economies, given the weak portfolio inflows into the country over the last two years. While this assertion may be true, we think that intensified pressure from foreign funds trapped in the economy since 2019/2020 could lead to depletion of FX reserve and amplify currency risk. For context on the magnitude of the trapped funds, the cumulative FPI holdings in Nigeria is estimated by the CBN at N37.0 billion, which is at par with 2019 levels. Hence, to curtail the FX pressure from these trapped funds and stimulate new inflows, the apex bank may have to hike the MPR by 50 to 100 bps by H2’22 and enhance the country’s carry trade to better reflect the risk environment.
In addition, the CBN is likely to continue deploying ad-hoc measures (given weak monetary policy transmission) in its fight to defend the Naira and support economic growth, even though the emphasis on the latter may wane as growth numbers remain stable. Overall, we project the domestic economy to grow by 2.7% in 2022 (10bps lower than CBN’s estimate of 2.8%).
