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Nigeria Monetary Policy July 2018

Nigeria: Central Bank leaves policy rate unchanged

At its 23–24 July meeting, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) decided to leave the monetary policy rate as well as all other monetary policy parameters unchanged, meeting market expectations. As a result, the policy rate remains at a record-high 14.00%, with the asymmetric corridor at plus 200 and minus 500 basis points around the monetary policy rate. In addition, the Committee left the liquidity ratio unchanged at 30.00% and the cash reserve ratio stable at 22.50%. Notably, three MPC members voted to raise the policy rate due to high inflationary pressures, and the Central Bank took steps at improving liquidity in the private sector to stoke economic growth.

The Bank’s decision to hold the monetary policy rate unchanged at a record-high figure reflects stubbornly high price pressures in Nigeria’s economy. Pressure from rising food prices has kept inflation well above the Bank’s target of 6.0%–9.0%, and several risks to the inflation outlook persist, including significant pre-election spending and the worsening farmer-herdsmen conflict in key food-producing states. That said, fragile growth dynamics in the economy could warrant stimulus, and the Central Bank decided to ease monetary conditions in an unconventional manner by improving the flow of credit to the private sector. Specifically, the Central Bank stated it would buy “commercial paper” or debt from credit-constrained businesses if necessary to spur activity and that it would be introducing a “differentiated dynamic cash reserve requirement regime” to improve access to cheap long-term credit.

Looking forward, the Bank struck a cautious tone in its communiqué, mentioning that coordinated fiscal, monetary and exchange rate policy should be put in place to stem high inflation. In addition, the Bank pointed out that monetary policy normalization in the U.S. could lead to capital flow reversal, which would be stoked further if the policy rate was loosened. However, inflation is forecast to retreat in the coming quarters. Assuming the foreign exchange market continues to remain stable or improve, the Bank’s preferences are likely to opt towards a rate cut going forward. The Bank also highlighted that the public’s preference is for a rate cut. The next Central Bank meeting is scheduled for 24 and 25 September.

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