November 24, 2021/United Capital Research
In line with our expectations, the Monetary Policy Committee (MPC) met yesterday and voted unanimously to keep all policy variables unchanged. Notably, the committee hinted at a rate hike in the near future, noting the US and other advanced economies’ impending hawkish tilt and the potential impact on capital flows into the country and other emerging markets. The committee, however, expressed confidence in current policies for sustaining Nigeria’s output rebound and indicated a strong preference for keeping the status quo.
While there appear to be valid arguments for raising the MPR, such as sustained economic growth (as evidenced by Q3-2021 GDP growth of 4.0% y/y and 11.1% q/q), and the fact that despite sustained disinflation, headline inflation (Oct-2021, 16.0%) remains much higher than the CBN’s target band (6.0%-9.0%), the decision to maintain the status quo suggests that policy considerations remain weighted towards stimulating growth. The CBN governor’s statements indicate that the MPC is comfortable with the pace of disinflation, which undermines the case for tightening.
In our view, keeping policy parameters on hold is necessary to sustain Nigeria’s economic recovery, amid high inflationary pressures, unemployment and FX liquidity challenges. Furthermore, there are stronger incentives for rates to be kept low, as the government’s debt servicing costs remain high, and the medium-term expenditure framework signals even more reliance on the debt market. However, going forward, we anticipate a gradual shift towards monetary tightening, as other emerging economies have begun to hike rates, including regional peers South Africa (+25bps) and Ghana (+100bps).
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