January 26, 2022/CSL Research
At the recently concluded Monetary Policy Committee (MPC) meeting, the first meeting for the year, the committee unanimously maintained all benchmark policy rates at their current levels. In line with expectations, the committee elected to keep the Monetary Policy Rate (MPR) at 11.5% to further engender positive and inclusive growth recovery and macroeconomic stability. Similarly, the asymmetric corridor was retained at +100bps/-700bps around the MPR. Also, the Cash Reserve Ratio (CRR) and Liquidity Ratio (LR) were held at 27.5% and 30.0%, respectively.
The decision was largely premised on strengthening output growth, while also remaining mindful of the hike in global interest rate indicators to combat inflation in some advanced economies, signaling possible capital reversal from emerging markets. A rate hike amidst the reduced volume of credit to the private sector would further constrain economic growth. A rate cut, on the other hand, though positive for interest rates and loan repayments, is likely to spur excess liquidity, intensify inflationary pressures which would widen the negative real interest rate, trigger FX demand pressure, and worsen capital outflows with its attendant impact on the currency.
The economy has continued its recovery from Q4 2020, with a 4.03% growth in Q3 2021 from 5.01% in Q2 2021. Also, the Manufacturing Purchasing Managers Index (PMI) has shown some level of improvement as it rose to 52.0 index points in December 2021 from 50.8 in November 2021, while the non- Manufacturing Purchasing Managers Index (PMI) tapered slightly to 48.0 index points in December from 48.6 points in November 2021.
Looking ahead, we believe the direction of the MPR at the next MPC meeting in March is highly contingent on a number of factors. While the CBN remained dovish in 2021 by net repaying c.N4.2 trillion in OMO bills, the CRR debits have been recently aggressive, suggesting that unorthodox monetary approaches are likely to persist. We envisage a rate hike in mid-2022 as the economy becomes more resilient. However, the risk of an earlier hike is possible if inflationary pressures are amplified faster than expected. Alongside the use of the MPR, we are likely to see continuous ad hoc measures to support economic activity further and address the FX imbalances.
The risk of FX depreciation will likely persist in the year due to capital reversal from emerging markets (EMs) and frontier markets (FMs) as inflation continues to bite harder in developed markets. As such, the CBN may be forced to enhance carry trade opportunities to reflect the country’s risk. The carry trade in Nigeria is estimated at 4.0% compared to countries like Egypt (12.3%) and Ghana (11.0%).
