March 21, 2022/CSL Research

The Central Bank of Nigeria (CBN) will hold its second Monetary Policy Committee (MPC) meeting in 2022 today and tomorrow, and we believe the benchmark policy interest rate will be left unchanged. Our expectation is hinged on the fact that the recent rise in inflation as well as the hike in interest rates by global Central Banks, which reduces carry trade opportunities, precludes a cut to the rates. On the other hand, the need to continue to support the still weak economic growth also means the authorities may still be reluctant to increase rates, albeit in the short term. Amidst the uncertainty created by the Russia-Ukraine crisis and the recent uptrend in inflation, we believe the Central Bank will be trying to maintain a balance between controlling inflation, providing stimulus for the weak economic growth and sustaining inflow of foreign funds to support forex reserves.

Growth and FX stability concerns are expected to outweigh inflation concerns

The economy has seen positive growth in the past 5 consecutive quarters. However, this has been largely supported by base effects, and the MPC, in its last statement in January, noted that the growth recovery is still fragile. This points to the fact that the upcoming policy would be clouded with concerns around sturdy growth and downside risks to the economic recovery, especially in light of the Russian-Ukraine crisis. While the Manufacturing PMI has been above the 50-index point mark in November (50.8 index points) and December (52.0 index points), we believe sustaining the expansion will still be a focus. Moreso, the CBN at the start of the year announced that it would sustain its intervention programme to a greater extent in 2022, with a bias to remain supportive of growth while ensuring that inflation remains within the tolerance level.

Inflation

The headline inflation reversed the downtrend in January, rising marginally by 10bps in February to 15.70% y/y, driven by elevated core inflation (up 14bps to 14.01% y/y). The incoming price data for March also suggests that the impact of the increased fuel costs amidst the fuel scarcity which extended into March points to an uptrend in March, which should also be a concern at the meeting. Also, the current rising cases of Omicron variant in the country’s major import partner, China, may lead to an increase in imported inflation arising from supply chain disruptions. However, despite the rising inflation, some comfort can be drawn from the expected post-harvest gains. Although globally, there has been an acceleration seen in commodity price inflation, which Central Banks such as the US Federal Reserve, Bank of England, have responded to by raising rates, we believe the CBN might be slower in adopting that measure, given the inflationary pressures are not demand-driven.

More use of unconventional tools

While the CBN remains consistent with its accommodative stance, we expect the CBN to continue to resort to its usual use of unorthordox measures via aggressive CRR debits to control money supply, even as government borrowing is set to increase.