July 20, 2022/CSL Research

• At yesterday’s MPC meeting, the authorities further raised the Monetary Policy Rate (MPR) by 100bps to 14.0% from 13.0%. The major consideration was the faster rise in inflation despite a prior 150bps hike.  
• The further rise in the MPR, if it translates to an increase in market rates will narrow the interest rate gap and make Naira bonds more attractive, which may be negative for the stock market. The NGX ASI, declined by 0.02% yesterday when the news broke.  

• We retain our view that a continuous hike in rate will likely constrain the country’s fragile growth while achieving very little in terms of combating inflation and attracting foreign inflows.
  

 In our last MPC review note in May 2022, we noted that the direction of the MPR at the next MPC meeting in July would highly depend on the turn of events in the local and global space. Since our update, pressure on consumer prices have remained unrelenting as the headline inflation has risen at a faster pace. The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) unanimously raised the MPR from 13.0% to 14.0%, the second consecutive hike and a cumulative 250bps increase within three months.

With the current narrative on inflation, the Committee was of the view that neither holding nor loosening the policy parameters was an option, given the impact of the rising inflationary pressures which may begin to erode the moderate gains achieved in improving consumer purchasing power. According to the committee, a hold stance would mean that the CBN was not responding sufficiently to the global and domestic price developments. In their view, the decision to tighten signals strong determination by the bank to address its price stability mandate and portray the MPC’s sensitivity to the impact of inflation on the vulnerable households.  

The MPC is at a crossroad in our view. Despite the initial 150bps hike in MPR in May to combat inflation, inflation rose faster in June and is showing no sign of abating. The current 14% rate is the maximum rate the CBN has reached since 2006 when the Bank replaced MRR with MPR. Looking ahead, inflation is not likely to slow down in the coming months while economic growth will likely remain fragile, and there is only a limit to the fragile economy’s ability to withstand the aggressive rate hike. Judging by the MPC’s posture at yesterday’s meeting, the CBN is more likely to stick on the path of a rate hike, especially at a time when election spending is partially fuelling add-on inflationary pressures. While the MPR at 14% is the highest level the CBN has ever gotten to in the past decade, the current realities suggest that the apex bank may be caught between a rock and a hard place. At a time when the global space is grappling with inflationary pressures, igniting aggressive interest lift-off, we do not rule out the possibility of another hike by the CBN in the last two meetings of the year. However, if the MPR is retained till year-end, there is the possibility of adjustments to other policy parameters such as the CRR, liquidity ratio or asymmetric corridor.

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