Monetary Policy: Is A Rate Hike Closer?


At the recent MPC meeting, the majority of members voted to maintain the status quo on all monetary policy tools, retaining the MPR at 11.5%, CRRat 27.5%, Liquidity ratio at 30.0%, and the Asymmetric corridor of +100/-700 around the MPR.

The committee’s decision to hold all policy parameters at the current level is in a bid to create a stable environment to allow for stronger economic recovery, as the recessionary pressures facing the country remain. This appears to be the right thing to do considering the current macroeconomic vulnerabilities and fragile state of recent recovery. However, the last MPC meeting saw three members shift towards tightening monetary policy in a bid to combat rising inflation.

This begs the question of whether a rate hike is around the corner. Truly, while inflation numbers have been on a consistent rise over the months, we think as the 135th MPC communique rightly affirms, inflationary pressures are largely costpush rather than demand-pull. Structural issues constraining food supply have driven food prices higher while increasing energy cost remains a significant contributor.

Going forward, we believe the MPC will eventually tilt towards tightening monetary policy particularly if Q1- 2021 GDP numbers show sustained recovery from a recession. I n addition, we note a hawkish monetary policy stance could drive improved FX flows and consequently, improve exchange rate stability. That said, we express our reservation on the efficacy of a hawkish monetary policy on surging cost-push inflation driven by supply-side constraints and rising energy costs.