Pre MPC Note: CBN May Hold Parameters Constant Despite Persistent Inflationary Pressures


Tuesday, May 25, 2021 / 09:29 AM /  by United Capital Research / Header Image Credit: Yicai


The Monetary Policy Committee (MPC) is scheduled to hold its third meeting of the year, from 24th to 25th of May 2021. Committee members will review the global and domestic economic developments to decide on the next policy action as the Nigerian economy enters a critical stage in its post-Covid recovery efforts.

Since the last MPC meeting in March-2021, overall, economic data has been somewhat mixed. NBS's data estimated the economy expanded by 0.51% y/y in Q1-2021, solidifying Nigeria's fragile exit from recession in Q4-2020. Also, Net domestic credit continues to expand in double-digit figures (11.1% y/y in April 2021 and 20.4% y/y in April-2020). On the other hand, inflationary pressures have continued to persist, albeit moderated slightly in April-2021 to 18.12%. Again, FX constraints continued unabated despite favourable prices in the commodities markets. The yield environment continues to rise on the back of inflation and tighter system liquidity.

Considering the aforementioned, we believe that the decision before the MPC is a choice between tightening policy variables in the face of persistent inflation and weak FX inflows or maintaining the status quo to sustain economic recovery. Clearly, a rate cut will only exert more pressure on the money supply, potentially worsening demand-pull inflationary pressure and further exacerbating the FX crisis. Again, the MPC is likely to hold the benchmark rate constant to keep the cost of FGN's borrowing moderate amid poor revenue mobilization and inconclusive subsidy debate.


However, we note that the committee would keep an eye on galloping inflation, although its primary drivers are supply-side and structural factors. Yet, the committee will also consider the weak FX inflows and, as such, may advise the apex bank to continue the pace of aggressive liquidity mop-up, which will spur a further uptick in yields. Give or take, probabilities seemed more tilted in favour of another hold decision rather than a hike.

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