Nigeria rate cut: FX stability and sluggish growth trump sticky inflation

Nigeria’s Net FX Inflow Rises to USD6.43 billion in April
REUTERS/Akintunde Akinleye

In a surprise move, the Central Bank of Nigeria’s (CBN) monetary policy committee (MPC) has cut the monetary policy rate (MPR) by 50bps to 13.5% from 14%.

The directional move is unsurprising, as fundamental indicators have called for looser monetary conditions, but the timing is somewhat unexpected for two reasons: 

  1. The MPC had kept the policy rate constant for 32 months;
  2. Many believed major policy decisions were unlikely prior to CBN Governor Godwin Emefiele’s forced hiatus period, which begins in April. As we recently noted, there is a growing sense that Emefiele is likely to be replaced in June, which would set the stage for a fresh set of policy reforms.

Although the persistently high inflation remains a worry for the MPC, the rate has remained largely stable for the much of the past year, ranging between 11.14% and 11.61% y-o-y – c7% lower than the 18.7% recorded in January 2017, following the devaluation of the naira. The MPC expects a slight increase to 12% over the coming months, but it has become increasingly clear that the lack of economic growth ranks higher on the list of concerns.

Figure 1: Inflation and policy rate

Nigeria rate cut: FX stability and sluggish growth trump sticky inflation - Brand Spur

Source: Bloomberg

Nigeria is recovering from its 2015-16 recession, but only very sluggishly – the World Bank and IMF expect growth to average c2% over the medium term. As we have written in the past, though, the CBN does not tend to employ a typical reaction function – ie one based on GDP growth and price levels – to set policy rates, preferring instead to stabilise the external reserves balance and, thus, reduce pressure on the naira.

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With recent news that dollar inflows into the country through the I&E window rose to US$3.5bn through February (a 94% increase over the same period a year prior) and external reserves have reached a five-month high of US$43.5bn (the stated figure represents a three-month moving average, so it is likely to rise in the coming months), the MPC clearly feels less of a need to attract additional inflows through tight policy and excessive treasury issuance. That said, this will ultimately be tested if we see a gradual reduction in OMO issuances from the CBN to correspond with the lower policy rate.