At the last MPC meeting held in May 2021, all twelve committee members unanimously voted to retain all policy parameters. The MPR was kept at 11.5%, with an asymmetric corridor of +100/-700 basis points around the benchmark interest rate; CRR was retained at 27.5%, and the Liquidity Ratio was put at 30%.
Since the last MPC meeting in May 2021, there have been noticeable movements in dominant macroeconomic variables. The YoY headline inflation decelerated for the third consecutive month to 17.75% in June 2021; Brent crude surged by 8.52% from $68.65/bl on the 25th of May 2021 to $74.50/bl yesterday; local oil production fell by 2.31% from 1.344mbpd in May 2021 to 1.313mbpd in June 2021; the exchange rate of the I&E FX Window rose marginally by 2bps from $1/N411.56 to $1/N411.50; and the position of our reserves dwindled by $1.04 billion from $34.29 billion on the 25th of May 2021 to $33.25 billion on the 23rd of July 2021, on the back of the lower oil production levels and efforts by the Apex Bank to stabilize the currency and clear the existing dollar backlog.
The MPC closely examined the economic data, finding some comfort in the third consecutive month of moderation in headline inflation recorded in June 2021, and also in the improvements seen in economic growth in Q1’2021 and in the composite PMI in July 2021.
However, the MPC remained trapped in the cross arrows of rising prices and tepid growth, leaving dovish or hawkish adjustments unfitting. Accordingly, at the end of the two-day bi-monthly MPC meeting, all policy levers were maintained following a unanimous vote by all members of the committee.
- Monetary Policy Rate (MPR) – 11.50%
- The asymmetric corridor around the MPR – +100/-700bps
- Cash Reserve Ratio – 27.50%
- Liquidity Ratio – 30.00%
CBN Reins in BDCs
Speaking on the FX situation, the Governor expressed concerns regarding the speculative activities by bureau de change operators (BDCs) and noted that the Apex bank will end the $20,000 weekly intervention given to all operators and also halt the issuance of new licenses to BDCs including those in the pipeline.
Hence, while the policy levers were left unchanged, the MPC’s strong stance on the FX situation and the subsequent clampdown on BDC operators will reverberate through the FX market, creating more scarcity and causing a further depreciation of the Naira. Hoarding of dollars is expected to accompany and exacerbate the kneejerk reaction in the market, as participants gear up for a tighter FX market.