Nigeria: Central Bank leaves policy rate unchanged as inflation slows
May 23, 2017
At its 22-23 May monetary policy meeting, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) unanimously decided to leave the monetary policy rate as well as all other monetary policy parameters unchanged, meeting market expectations. The monetary policy rate remained at 14.00% and the asymmetric corridor at plus 200 and minus 500 basis points around the key rate. Moreover, the Committee left the liquidity ratio unchanged at 30.00% and the cash reserve ratio stable at 22.50%.
The latest policy decision shows the difficult position that the CBN finds itself in. On the one hand, lowering interest rates would spur economic activity following the worst slump in 25 years in 2016, by encouraging investment and consumption. On the other hand, lower rates could fuel inflationary pressures, reversing the downward trend in inflation witnessed in recent months and weakening the naira, which has already lost considerable value over the last 12 months. With inflation still significantly above the Bank’s target range of 6.0%-9.0%, and recently released Q1 GDP figures hinting at a gradual healing of the economy, the CBN decided to stay put for the time being.
The communique was devoid of strong forward guidance, although the Bank did mention the possibility of raising rates in response to an envisaged expansionary fiscal policy as part of the government’s Economic Recovery and Growth Plan (ERGP), so as to ensure sufficient banking liquidity. However, if liquidity problems don’t emerge, the Bank should have some slight wiggle room to lower rates going forward, as inflation is gradually retreating and demand-pull pressures are weak.
The next Central Bank meeting is to be held on 24 and 25 July.
Author: Jan Lammersen, Economist