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Nigeria Monetary Policy September 2020

Nigeria: Central Bank delivers second unexpected rate cut this year in September

At its 21–22 September meeting, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) decided to axe its monetary policy rate by 100 basis points to 11.50%, marking the second cut so far this year and the lowest rate since February 2016. Six committee members backed the decision, one called for less aggressive easing and the remaining three voted to stay put. The decision surprised market analysts, who had expected the CBN to remain on hold. In addition, the Bank lowered the asymmetric corridor from plus 200 and minus 500 basis points to plus 100 and minus 700 basis points around the monetary policy rate. The rest of policy parameters were left unchanged; thus, the liquidity ratio remained at 30.00% and the cash reserve ratio at 27.50%.

The MPC’s decision reflected the priority to further stimulate a contracting economy despite quickening inflation, which has remained above the Bank’s target range for over five years now. The economy contracted heavily in Q2 on the twin impact of the Covid-19 pandemic and low oil prices, and the Bank expects it will continue to grapple with those effects during the second half of the year, with growth not estimated to return until Q4 or Q1 2021. On the price front, inflation has been climbing steadily over the past few months, reaching an over two-year high of 13.2% in August (July: 12.8%). Supply-side bottlenecks, security challenges which have dampened food production, adverse weather conditions and pass-through effects from the recent currency devaluation have all stoked price pressures. The CBN assessed that these same factors, combined with the removal of fuel subsidies and a hike in electricity tariffs, will further exert upward pressure to prices going forward. Despite this outlook, however, the Bank deemed that previous liquidity injections to strategic sectors as part of its Covid-19 relief efforts, coupled with its expansionary policy move, which is intended to pressure banks to extend cheaper credit, will stimulate production and increase aggregate supply, thus helping to moderate inflation ahead.

Looking ahead, the communiqué was not clear cut in its forward guidance. The Bank’s latest move raises questions, however, on whether it will be enough to stimulate an economy which faces a looming recession if long-standing structural bottlenecks and restrictions to foreign exchange access are not addressed, in addition to risking fanning price pressures further by increasing the money supply.

Commenting on the CBN’s decision, Razia Khan, Head of Research for Africa and Middle East at Standard Chartered Bank, noted:

“The CBN hopes that its easing, alongside the continuation of a punitive LDR policy used to encourage bank lending, will stimulate new credit growth to the economy. Although a departure from monetary orthodoxy, the CBN view such lending as necessary for the easing of price bottlenecks. More importantly, stimulating credit growth is seen as an even greater priority given the economy’s 6.1% y/y contraction in Q2. With both oil and non-oil revenue remaining pressured, and delays to hoped-for World Bank budget support, the CBN will likely want to keep domestic financing conditions accommodative.”

The next monetary policy meeting is scheduled for 23 November.

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