In what can be regarded as a shocking event, the Monetary Policy Committee (MPC) voted to increase the MPR to 13% at its recently concluded meeting, the first rate hike since July 2016. In terms of voting pattern, six members voted to increase the MPR by 150bps, four voted for a 100bps hike, and one voted for a 50bps increase in the MPR.
The Committee also voted to retain the Cash Reserve Requirement (CRR) at 27.5%, liquidity ratio at 30.0% and asymmetric corridor around the MPR at +100bps/-700bps.
According to the Central bank Governor, the Committee decided to hike interest rates after careful consideration of the need to strike a delicate balance between containing inflationary pressures whilst supporting economic recovery and mitigating capital flow reversals associated with global central banks’ normalisation of monetary policy.
On domestic growth, the Committee highlighted the sustained economic growth momentum in Q1-22 (3.11% y/y VS Q4-21: 3.98% y/y) and attributed it to the spillover effect of continued policy support on aggregate consumption expenditure.
Farther out, the Committee expects output growth to continue, albeit at a much-subdued pace, given the unfolding pass-through impact of domestic and external shocks on the economy. Accordingly, the Committee expects the economy to grow by 3.24% in 2022E, in line with the CBN’s estimates which is slightly below our revised projection (3.51% y/y).
On inflation, the Committee expressed concerns about the domestic inflationary pressures, which increased for the third consecutive month in April (16.82% y/y vs March: 15.92% y/y), given price increases across the food (+117bps to 18.37% y/y) and core (+26bps to 14.18% y/y) inflation sub-baskets.
However, the Committee attributed the increase in the core inflation to high energy prices and a progressive hike in electricity tariffs. Similarly, the Committee noted that the increased food prices continue to reflect legacy structural constraints and security challenges in the food-producing regions. Overall, the Committee expects that consumer prices will remain elevated, particularly given the spending associated with the build-up of election activities.
