Nigeria: Central Bank leaves policy rate unchanged in July but adopts a more dovish tone
July 25, 2017
At its 24-25 July monetary policy 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. The monetary policy rate remained at 14.00% and the asymmetric corridor at plus 200 and minus 500 basis points around the monetary policy rate. Moreover, the Committee left the liquidity ratio unchanged at 30.00% and the cash reserve ratio stable at 22.50%.
However, in contrast to May’s meeting, which saw the committee unanimously vote to keep rates unchanged, two of the eight members present at the July meeting argued for a loosening of monetary policy. To support their case, they pointed out that the economy remains unsteady on its feet; indeed, GDP contracted in Q1, and investment is being curtailed by tight credit conditions, with credit growth to the private sector flat since the start of the year. In addition, inflation fell for the fifth consecutive month in June, dampened by a more stable foreign exchange market, providing more wiggle room to cut rates.
However, despite declining, headline inflation still remains well above the Central Bank’s ostensible target of 6.0%–9.0%, with the effects of elevated energy and transportation costs proving hard to shake off. Any easing of monetary policy could risk fanning the flames of inflation once more. In addition, the Central Bank has managed to achieve greater stability in the foreign exchange market in recent months, with the gap between the official and parallel exchange rates narrowing considerably and sizeable increases in foreign exchange inflows. Reducing interest rates now could potentially jeopardize this hard-won situation, by reducing portfolio investment and leading to a depreciation of the parallel market exchange rate. Furthermore, fiscal policy is set to be expansive this year, as outlined in the 2017 budget, which could generate greater demand-pull cost pressures; it is therefore prudent for monetary policy to remain fairly tight for the time being as a counterbalance.
The Bank struck a dovish tone in its communique, mentioning that at the current juncture the policy options were to stay put or to loosen its stance. With inflation forecast to retreat further over the coming months, and assuming the foreign exchange market continues to exhibit recent positive tendencies, the Bank’s preferences are likely to swing more towards a rate cut going forward. This is the view of FocusEconomics panelists, who see the Bank trimming rates before the end of the year, and to continue its easing cycle into 2018.
The next Central Bank meeting will be held on 25 and 26 September.
Author: Oliver Reynolds, Economist