Stay focused on growth
Monday, March 21, 2022 / 11:48 AM / by CSL Research / Header image credit: Premium Times
The Central Bank of Nigeria (CBN) will hold its second Monetary Policy Committee (MPC) meeting in 2022 today and tomorrow, and we believe the benchmark interest rate will remain unchanged. Our expectation is that the recent rise in inflation as well as interest rate hikes by global central banks, which reduce carry opportunities, prevent a rate cut. On the other hand, the need to continue to support the still weak economic growth also means that the authorities could still be reluctant to raise rates, even in the short term. Amid the uncertainty created by the Russian-Ukrainian crisis and the recent upward trend in inflation, we believe the Central Bank will attempt to maintain a balance between controlling inflation, stimulating weak growth economy and maintaining the inflow of foreign funds to support foreign exchange reserves. .
Concerns about growth and currency stability should outweigh inflation concerns
The economy has experienced positive growth for the past 5 consecutive quarters. However, this was largely supported by base effects, and the MPC, in its latest statement in January, noted that the recovery in growth is still fragile. This indicates that policy ahead would be clouded by concerns about robust growth and downside risks to the economic recovery, especially in light of the Russia-Ukraine crisis. Although the manufacturing PMI exceeded the 50 index point mark in November (50.8 index points) and December (52.0 index points), we believe that the continuation of the expansion will remain a priority. Additionally, the CBN announced earlier this year that it would further maintain its intervention program in 2022, with a bias to remain supportive of growth while ensuring inflation remains within tolerance. .
Inflation
Headline inflation reversed the downtrend in January, rising slightly by 10bps in February to 15.70%y/y, driven by elevated core inflation (up 14bps to 14.01 % a/a). Incoming price data for March also suggests that the impact of rising fuel costs amid the fuel shortage that stretched into March is pointing to an upward trend in March, which should also be a concern during the meeting. In addition, the current increase in Omicron variant cases in the country’s main import partner, China, could lead to an increase in imported inflation resulting from supply chain disruptions. However, despite rising inflation, some comfort can be drawn from expected post-harvest gains. Although globally there has been an acceleration in commodity price inflation, to which central banks such as the US Federal Reserve and the Bank of England have responded by raising rates, we think the CBN might be slower to adopt this measure, given inflationary pressures are not demand-driven.
Increased use of unconventional tools
Although the CBN remains consistent with its dovish stance, we expect the CBN to continue to resort to its usual use of unorthodox measures via aggressive CRR debits to control the money supply, even as government borrowing is expected to increase.
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