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Nigeria Monetary Policy July 2023

Nigeria: Central Bank slows pace of hiking in July

At its 24–25 July meeting—the first under acting Governor Folashodun Shonubi—the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) decided to raise the key rate to 18.75% from 18.50%. Moreover, the Bank narrowed the interest rate corridor to +100/-300 basis points around the key rate from +100/-700 basis points. The move was below market expectations and ran counter to President Tinubu’s pledge for lower interest rates. That said, the increase was the smallest in the current tightening cycle, which has seen a cumulative increase of 725 basis points since May 2022.

In its communiqué, the Bank stated that all of its members voted for either a hold—5 out of 11—or a hike—6 out of 11—with 4 voting for 25 basis points and 2 for 50 basis points. The CBN pointed to the persistent rise in inflation over recent months and its negative impact on the domestic economy as the main motivating factors for the hike. In addition, committee members feared that the removal of fuel subsidies in late May and the exchange rate liberalization in mid-June—which caused a sharp depreciation of the naira—would exacerbate inflation in the coming months.

The Bank’s forward guidance remained muted. That said, the fact that it delivered a smaller hike and that 5 members voted for a hold—as opposed to none in the previous meeting—coupled with President Tinubu’s calls for lower rates, points to a reduced appetite for large hikes going forward. Nonetheless, our panelists see the Bank hiking again in upcoming meetings to tackle accelerating inflation.

The next meeting will take place on 25–26 September.

Analysts at the EIU commented on the outlook:

“We view the MPC’s decision as an indication that the CBN will continue to react to economic information, rather than being proactive in setting expectations. Because Nigeria’s financial sector is relatively small—private-sector credit extension is about 20% of GDP—controlling inflation through the interest-rate channel requires aggressive tightening for lengthy periods. Hence the CBN has missed an opportunity to get ahead of inflationary forces on the immediate horizon. […] The next sitting in September will be the acid test of how the CBN reacts to higher inflation, but a dovish bent among committee members also cements our expectation of negative real interest rates throughout the 2023-27 forecast period.”

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