The Central Bank of Nigeria slashed its monetary policy rate by 200 basis points this week to 11%. this was the first time the bank eased policy since 2009. Furthermore, the symmetric corridor of +/-200 basis points around the MPR was changed to an asymmetric corridor of +200/-700 basis points around the MPR, meaning that the central bank will borrow at 4% p.a and lend at 13% p.a. The move definitely goes against the tightening trend that we are seeing in the region with Ghana, Zambia and South Africa being the latest countries that that have
recently hiked interest rates.
The move was particularly surprising given that the artificially overvalued Naira continues to pose upside risk to the already elevated inflation rate. Inflation in Nigeria has been at 9.3% and therefore running above the Banks target of 6% – 9% for the past five months. While it has shown signs of reprieve, FNB believes that import restrictions imposed by the central bank will exert upward pressure on inflation in the medium-term. However, this unexpected move by the central bank leads us to believe that they may keep the currency overvalued for a longer period than we had anticipated; this should limit the increase on headline inflation. Nonetheless, it is clear that the Bank is more concerned about the country’s growth prospects. In fact, the 5% reduction of the cash requirement ratio to 20% that accompanied the reduction of the MPR will only be granted to banks who lend to growth stimulating sectors i.e. infrastructure, agriculture, solid mineral and the real sector.
It is unclear how this will, on its own, be successful given that the weakness in non-oil GDP growth has been self-imposed—Nigeria, implemented import restrictions of intermediary goods to stem currency weakness. FNB remains sceptical about this policy move given that the liquidity injection will likely translate into increased dollar demand.