The Monetary Policy Committee (MPC), at its meeting held on May 24 -25, 2021, voted to keep all its policy rates unchanged from previous levels. Specifically, the Committee voted to:
- Retain the Monetary Policy Rate (MPR) at 11.50%.
- Retain the asymmetry corridor at +100/-700 basis points around the MPR.
- Retain the Liquidity Ratio at 30.00%.
- Retain CRR at 27.50%.
The Committee’s Considerations
In arriving at a decision, the Committee noted the activities in the global economy, notably the high inflationary pressures due to legacy structural issues, capital flows reversal, and exchange rate pressures.
The Committee also noted the global financial market stability, resulting from the accommodative monetary stance by monetary policy authorities across the globe. However, the Committee maintained that a monetary policy normalisation may begin by Q4 2021.
In the domestic economy, the marginal GDP growth of 0.51% in Q1 2021 was noted, driven by the non-oil sector. The Committee also noted the improvement in the Manufacturing Purchasing Manager Index (PMI) from 48.80 index points in March 2021 to 49.00 index points in April 2021.
On the other hand, the NonManufacturing Purchasing Manager Index (PMI) declined from 47.90 index points to 43.30 index points. The moderation in the inflation rate from 18.17% in March 2021 and 18.12% in April 2021 was also highlighted, in which the Committee partly attributed to sustained CBN’s intervention in various sectors of the economy, particularly the SMEs.
In the foreign exchange market, the Committee noted the continued pressure and applauded the CBN’s efforts in stabilising the foreign exchange market. The external reserves declined to $34.17bn as of May 21, 2021, from $34.29bn as of April 2021, reflecting sales to the foreign exchange market and third-party payments.
The Committee posits a slow recovery in both the global and domestic economies, due to the lingering impact of the coronavirus pandemic.
The Committee expects to see improved macroeconomic conditions in the domestic economy, premised on sustained government intervention in the agricultural sector, improved food supply, and declining inflationary trend – on the back of improved fiscal and monetary policies.
The Committee expects an improved economic capacity and full restoration of the supply chain to ease inflationary pressures.
On inflation management, the Committee expressed that its administrative policy approach to control money supply has begun to yield results. The Committee also believed that its intervention efforts to drive output growth have started to yield results.
The MPC Holds
The Committee expressed that the recent economic developments presented two broad options, which included either to combat the high inflationary pressure or continue its pro-growth stance.
Therefore, the policy options were to ease monetary policy to drive credit growth and boost economic recovery, or to tighten to moderate price developments.
The Committee voted to maintain its hold stance to allow its current alternative policy approaches to permeate. The Committee argued that while an easing stance could quicken the pace of economic recovery, the downside of an easing approach would result in price instability in the economy.
On the other hand, while a tightening approach could tackle the monetary drivers of inflation, the structural drivers of inflation remain and could keep inflation levels higher. Also, a tight stance will hamper the CBN’s objectives of providing credit for households and other economic units.