MPC Maintains Status Quo, Debunks Reports of FX Regime Change

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CBN InfraCorp
The Monetary Policy Committee (MPC) concluded its two-day policy meeting on Tuesday, 23rd of March 2021, with six of the nine committee members in attendance voting to hold all policy parameters constant (compared to the unanimous vote in favour of same in the January MPC).
The distribution of votes appeared to reflect the committee’s desire not to unsettle the country’s nascent economic recovery and to remain in a prime position to inspire more targeted credit support to households, SMEs, health, as well as agric and manufacturing sectors.
In effect, the benchmark interest rate (MPR) was held at 11.50 percent, while the asymmetric corridor remained at +100/-700 bps around the MPR. CRR and Liquidity ratios were also held at 27.5 percent and 30.0 percent, respectively.
As expected, the primary considerations at the policy meeting revolved around

growth, credit creation, inflation, and currency devaluation and unorthodox measures such as the naira 4 dollar scheme.

Highlights

According to the Governor of the Central Bank, Godwin Emefiele, the committee’s attention is likely to shift to aggressive inflation containment if economic growth reading in Q1’21 becomes relatively robust, and the price pressures accentuate.

“Even though Nigeria’s inflation remains primarily supply side, we view the Governor’s revelation as an indication that the apex bank may be more inclined to allow the domestic interest rate environment to reflect macro realities in the coming months. This view may favour a strategy which limits exposure on fixed income duration in the interim,” said analysts at Cardinal Stone Partners.

The committee also seized the opportunity to highlight that it has been
comfortable with the I&E naira to dollar trading band of c.N409/$ to c.N413/$
for most of the current year while emphasising that the country still operated
a managed float system requiring intermittent interventions by the apex bank.
The clarification on the exchange rate regime directly contradicts recent
media reports that Nigeria has moved into a flexible exchange rate regime.
However, the committee noted that international best practice suggests that
the rate for the monetisation of inflows should be +/-2.0% of the nominal
exchange rate (I&E rate in Nigeria’s case) in a country.
It also revealed plans to sustain efforts to encourage more significant remittances, FDIs, and exports to support reserves and the currency. On inflation, the committee again qualified the drivers of price pressures as essentially supply-side factors, exacerbated by
insecurity in food-producing states that require solutions beyond the remit of monetary policy

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