Again, in line with the expectations of Cordors Capital, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) resolved by a majority vote to increase the Monetary Policy Rate (MPR) by 50bps to 18.0% at its March policy meeting. Thus, the MPR is now at its highest level since November 2002 (18.5%). As we envisaged, the voting pattern shows that an aggressive rate hike was entirely out of the conversation at this meeting as 10 members voted to raise the MPR by 50bps, 1 member voted to increase the MPR by 25bps and the remaining member voted to hold the MPR. In the same vein, the Committee voted to maintain other policy parameters at current levels; the asymmetric corridor around the MPR at +100bps/-700bps, Cash Reserve Requirement (CRR) at 32.5%, and Liquidity ratio at 30.0%.
On domestic growth: The MPC acknowledge the improved domestic economic activities in Q4-22 (3.52% y/y vs Q3-22: 2.25% y/y), attributing the performance to the (1) sustained growth in the services and agriculture sector and (2) CBN’s continued intervention in growth-enhancing sectors. Likewise, the Committee expects that real GDP will sustain its recovery for the rest of 2023 but at a subdued pace because of the evolving and persisting shocks to the domestic economy.
On Inflation: The Committee was concerned about the marginal increase in year-on-year headline inflation in February, primarily due to higher food prices in the period. Still, the MPC noted that the risks to domestic prices remain high, including (1) expectations of the PMS subsidy removal, (2) increases in other energy prices, (3) exchange rate pressures, and (4) legacy infrastructure challenges.
Cordros’ View
Before this meeting, we stated that the MPC is at a crossroads of navigating between the Scylla of pausing as risks of overtightening emerge and the Charybdis of hiking too much and watching the economy fall off a cliff (see report: Arguments in Favour of a 50bps Hike in MPR). Thus, we argued for a 50bps hike in MPR as a balance between the two dilemmas. As we envisaged, the Committee opted for a 50bps increase in the key policy rate noting that the debate at this meeting was whether to (1) continue its rate hike to further dampen the rising inflation trajectory or (2) adopt a HOLD stance to observe emerging developments and allow for the impact of the last five rate hikes to permeate the economy. In the Committee’s view, the persisting headwinds to headline inflation provide a compelling argument for an upward adjustment to the key policy rate, albeit slowly. Elsewhere, given the recent cases of bank failure in the United States and Switzerland, the MPC highlighted that it examined the impact of further policy rate hikes on the stability of the banking system. In its assessment, the Committee was convinced that further rate hikes would not adversely impact the Nigerian banking system’s stability. However, the Committee called on the CBN to strengthen its regulatory oversight of the banking system to ensure that the banking industry remains stable and resilient.
