Monetary policy remained broadly accommodative in 2020. The monetary policy committee (MPC) during the year, voted to reduce the MPR twice; in its May meeting and its September meeting, following a CRR hike in its January meeting.
As such, the MPR was slashed by 200bps to 11.5% and the asymmetric corridor around the MPR was revised to +100/-700bps. The Cash Reserves Ratio (CRR) was hiked to 27.5% while the liquidity ratio was retained at 30.0%.
Notably, the committee insisted that rising inflation was driven by structural rather than monetary factors. Hence, the committee favoured supply-side policies of the CBN and lauded the Apex bank’s intervention funding & FX management in the wake of the negative impact of the lockdown triggered by Covid19.
Overall, the impact of the MPC’s monetary policy stance can be observed in the net OMO inflow of close to N4.0trn into the system in 2020, compared to net OMO mop-ups over the last five years.
In view of the first policy meeting of the MPC by midweek, we think monetary policy in 2021 will be driven by the need to urgently stimulate growth in the face of a recession. As such, the MPC/CBN will sustain its accommodative stance to ensure a V-shaped recovery and avoid a W-shape.
Also we opine that the CBN can still make use of a number of policy tools within its disposal to guide its accommodative tone. For instance, the CBN retains discretion over the rollover of the N4.1tn special bills which it could use to bolster liquidity should it intend to remain accommodative.
That said, we think the CBN may revert to a hawkish tone later in the year should economic activities recover considerably considering galloping inflation and weak FX inflows from FPIs.