Flashnotes Issue 15

Highlights

• Recently, the CBN raised the MPR to 24.75% on the back of heightened inflationary pressures. The apex bank also retained the CRR at 45% in addition to narrowing the asymmetric corridor to 100/-300bps around the MPR. These moves are not only consistent with market expectations, but also reaffirm the independence of the CBN in its conduct of monetary policy.
  
  
• We expect the higher MPR to attract greater FX inflows that would drive the appreciation of the Naira in the foreign exchange market. Most of these gains are expected to come from portfolio investments with the risks of sharp reversals when market signals change.
  
  
• However, there are risks of inadvertent growth slowdown associated with the policy. With the real sector already burdened by high borrowing costs and inflation, the CBN’s decision could further shrink the sector by disincentivising investments. This may adversely affect employment and growth levels. Furthermore, the policy may also give rise to higher non-performing loans.
  
  
• The next few months will be important for assessing the impact of the CBN’s monetary tightening on inflation. Statistically, inflation is set to lose steam after mid-year largely because of the onset of base effect, except economic policies that significantly pressure prices are implemented. Attributing a decrease in inflation solely to the tightening of liquidity once the base effect kicks in after mid-year might be inaccurate.
  
  
• Addressing Nigeria’s supply-side bottlenecks is crucial for taming its cost-push inflation. Unless these bottlenecks are sustainably addressed, inflation may yield little to monetary tightening.

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