21 May 2019 : The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), in its third meeting of the year, voted by a majority of 9 out of 11 to HOLD the Monetary Policy Rate at 13.50%, as well as to keep all other policy levers stable. Notably, two of the committee members voted to cut rates by 25bps to 13.25%. The decision was expected, given the continued slowdown in the global economy and persisting uncertainties; including the ongoing trade war between the U.S. and China, volatility in the oil market and the debt-constrained fiscal operations of emerging markets and developing economies (EMDEs), including Nigeria. 

Dimmer economic outlook tempers expectation 

The committee struck a less optimistic tone than the previous meeting, noting the rising public and private debt profiles of emerging market economies, as well as weakening global economic growth. The CBN governor, who chaired the meeting, also highlighted the reversal in headline inflation, which inched up from 11.25% y/y in March to 11.37% y/y in April. Whilst financial markets saw a rebalancing from equities to fixed income securities, the committee expressed optimism that capital markets in EMDEs would benefit from the accommodative policy stance of the advanced economies. 

With Q1’19 GDP in Nigeria slowing to 2.01%, the committee noted its concern for the country’s weak growth reality. As such, the committee called for the formulation of a mechanism through which the CBN could limit deposit money banks’ (DMBs) access to government securities, either through incentives or alternative lending strategies, so as to encourage lending to the private sector, which they highlighted as essential for spurring economic growth. 

Expect cautious policy moves amid mild inflation resurgence 

Global and domestic developments have conditioned an atmosphere of weak sentiment towards the macro-economic and financial environments, forcing central banks to return to and maintain accommodative monetary policies. 

With our expectation for inflation to continue to rise through the second quarter, driven by the increase in food price and potential minimum wage hike implementation, we expect the committee to tread cautiously amid its current dovish posture. That said, whilst the scope for credit expansion to the real sector by banks remains tepid in the near term, we eagerly await the developments around the noted policy regarding the limiting DMBs’ access to investments in government securities. 

Reporting for EasyKobo on Tuesday , 21 May 2019 in Lagos, Nigeria

Source: Vetiva Capital Management Limited