Nigeria: Central Bank unexpectedly cuts rate to lowest in four years in May
May 28, 2020
At its 28 May meeting, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) decided to slash its monetary policy rate by 100 basis points to 12.50%, marking the first rate cut since March 2019 and bringing it to a four-year low. Seven committee members backed the decision, while the remaining three called for even more aggressive easing. The decision took analysts by surprise, whom had broadly expected the Bank to stay put. In addition, all other monetary policy parameters were left unchanged. Thus, the asymmetric corridor remained at plus 200 and minus 500 basis points around the monetary policy rate; the liquidity ratio at 30.00%; and the cash reserve ratio at 27.50%.
The marked deterioration of the economic scenario due to the Covid-19 outbreak and collapse of global oil prices prompted the CBN to loosen its stance, despite the rising inflationary pressures seen recently. Although annual GDP growth in the first quarter beat expectations on the back of higher oil production, the MPC noted that the outlook for the second and third quarter has drastically darkened due to the pandemic. On the price front, inflation has been rising steadily over the past few months and held steady at March’s 12.3% in April, an over two-year high and remaining well above the CBN’s target range of 6.0%–9.0%, where it has been for nearly five years now. Against this background, the CBN’s decision, which comes on top of a slew of liquidity measures that have been rolled out previously, could help cushion the downturn and support the recovery. However, the cut could stoke price pressures and add pressure to the currency.
Looking ahead, the communiqué was not as clear cut in its forward guidance, though the CBN remained optimistic on the policy tools it has activated recently to stimulate aggregate demand and supply in the face of the pandemic. In particular, the CBN highlighted that although the economy may contract in the coming two quarters, it could recover in the final stretch of the year.
Author: Javier Colato, Economist