MPC unanimously vote to hold all Policy Parameters albeit understating Capital Flight
At the end of the first Monetary Policy Committee (MPC) meeting for the year, which was held on the 24th and 25th January 2022, the CBN held all policy parameters constant. (MPR at 11.5%, asymmetric corridor maintained at +100bps/-700bps, the Cash Reserve Ratio at 27.5% and the Liquidity Ratio at 30%), citing the need to support economic growth while keeping inflationary pressures at bay.
This decision comes as the global economy moves toward monetary policy normalisation on the back of the rising inflation rate. For instance, the U.S. economy is experiencing about a 40-year high inflation rate (at 7.0%) dating back to June 1982, and the UK has a 30-year high inflation rate of 5.4%. Hence, the global economic trend is aimed at reducing the persisting high inflation rate in these advanced economies.
In arriving at the Committee’s decision, the CBN governor noted the peculiarity of the problems encountered by the Nigerian economy, such as persisting high inflation and weak output growth, which require a combination of contractionary and expansionary policy approaches.
Additionally, he opined that the Nigerian economy is not likely to suffer any capital flow reversal as the excess liquidity in developed economies did not flow into the Nigerian economy. Summarily, the Committee is concerned with the challenges in the country, causing a decision to hold all policy parameters rather than tighten to reduce inflationary pressures and spur foreign investments.
Obviously, from the Governor’s briefing, loosening the monetary policy was not feasible given the corresponding inflation and exchange rate pressures. Consequently, the Committee opted to sustain unconventional policy measures such as the CRR to control inflationary pressure and support interventions in the real sectors to spur economic growth.
In our opinion, the CBN’s wait-and-see stance is justifiable given the current economic conditions, such as the growth experienced in the economy from Q1 to Q3 2021 and the positive outlook for Q4’21, coupled with the consecutive 8-month disinflations to Nov ’21 experienced in 2021 (until the Dec ’21 festive season demand led to a halt in the moderations) and the need to spur economic output and continue to monitor the policy stance of the global economy within the first quarter of 2022. In the near term, we share a similar view of a hold strategy (pending when major global economies like the U.S. start to hike the interest rates in Q2’22), most especially in Q1’22 as the impact of the high base effect on the inflation rate will likely resume and eventually wane out at the end of the first quarter.