September 24, 2024/Coronation Research
MPC Decision
- Monetary Policy Rate hiked by +50bps to 27.25% from 26.75%.
- Asymmetric corridor of the MPR retained at +500bps /-100bps.
- Cash Reserve Requirement for Deposit Money Banks raised to 50% from 45%.
- CRR for Merchant Banks raised to 16% from 14%.
- Liquidity ratio retained at 30%.
At the meeting, the MPC chose to further tighten the MPR to safeguard gains made to date in moderating inflation. This followed a review of upside risks to price development and the reduced risk to output growth and economic recovery. Eleven of the twelve members of the Monetary Policy Committee were in attendance at its meeting which concluded today.
The committee noted that despite the downward trend in headline inflation, which was due to moderation in food inflation, core inflation has remained elevated, driven primarily by energy prices. Concerns were raised about the persistence of inflationary pressure. The committee reiterated the need to work in close collaboration with the government to address and counteract upward pressure on energy prices.
Considering the weight of food in the Consumer Price Index (CPI) basket, the CBN Governor highlighted upside risks to food inflation, notably recent floods, the recent hike in energy prices, scarcity of petrol (PMS), and insecurity in some food producing communities. The committee commended the recent intervention of the FGN with its introduction of a duty-free import window for food commodities.
The MPC expressed optimism that roll-out of petroleum products from the Dangote refinery may moderate transportation costs and significantly support the easing of pressure on food prices in the short-to-medium term. This is also expected to moderate foreign exchange demand for importation of refined petroleum products, with positive knock-on effects on the balance of payments and foreign exchange reserves.
The MPC affirmed that the real interest rate remains negative. It emphasised that efforts must be sustained to achieve a positive real interest rate in order to attract investment, to enhance the attractiveness of the Naira for international capital and to improve the exchange rate.
The MPC acknowledged the continued growth in money supply, recognising the need to curtail excess liquidity in the system, as well as to address foreign exchange demand pressure. Hence, it increased the Cash Reserve Ratio (CRR) for commercial and merchant banks by +500bps and +200bps, respectively.
The committee observed a strong correlation between FAAC payments and liquidity in the banking system, with a passthrough effects on the exchange rate. The MPC agreed to increase monitoring of future payments with a view to addressing its effect on inflation and the exchange rate.
The MPC raised concerns about the growing fiscal deficit. However, it lauded the fiscal authorities’ commitment not to resort to monetary financing through ways & means loans, which we understand as encouraging the fiscal authorities not to further engage in ways & means borrowing.
On FX market dynamics: The committee noted relative stability and convergence in exchange rates across various market segments resulting from the CBN’s tight monetary stance. Since the last MPC meeting held in July ‘24, the Naira/US dollar rate had appreciated marginally, by +1.5% in the NAFEM window, closing at N1,562.7/US$1 as at 23 September 2024.
On bank sector stability: The committee asserted that the banking industry remained safe, sound and stable, despite headwinds. The committee however emphasised the need to sustain supervisory oversight over the industry to strengthen its continued support of the economy.
The last MPC meeting for the year is scheduled to hold on 25th and 26th November 2024.
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