March 22, 2022/CSL Research

While other central banks are increasing rates in the face of rising inflation, the Central Bank of Nigeria (CBN) has maintained its accommodative stance. Unlike the first meeting in January, where the committee unanimously maintained all benchmark policy rates at their current levels, some committee members voted for a rate hike at the current meeting. 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 macro-economic stability. Similarly, the asymmetric corridor was retained at +100bps/-700bps around the MPR. Also, the Cash Reserve Ratios (CRR) and Liquidity Ratios (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 rising domestic inflation and the hike in global interest rates to combat inflation in some advanced economies, signalling possible capital reversal from emerging markets. A rate hike amidst the reduced volume of credit to the private sector would constrain economic growth, further disturbed by the potential external and domestic headwinds from the Russia-Ukraine crisis. A rate cut, on the other hand, amid rising inflationary pressures and the hike in interest rates by global Central Banks would further reduce carry trade opportunities, 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 3.98% growth in Q4 2021 from 4.03% growth in Q3 2021. Also, the Manufacturing Purchasing Managers Index (PMI) has remained above the 50-index point mark, with the recent one in February 2022 at 50.1 index points, while the non- Manufacturing Purchasing Managers Index (PMI) remained below the 50-index point mark at 49.0 index points in February from 49.1 points in January 2022. Looking ahead, we believe the direction of the MPR at the next MPC meeting in May 2022 will still be highly dependent on the turn of events in the domestic and global space. Judging from the turnout of events at yesterday’s MPC meeting, the MPC will be reluctant to raise interest rates until clear evidence of sturdy growth is seen while relying on the continuous use of unorthodox policy measures such as CRR debits to control the money supply.

While major central bankers have started to raise rates, we believe the MPC will be slow in taking that route given the already low level of foreign participation and the fact that inflation in the country remains largely supply-driven. However, the risk of an earlier hike is possible if inflationary and FX pressures intensify.