The decision of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) to maintain the status quo has aggravated uncertainty about policy direction in Nigeria. Managing Director, Chief Economist, Africa, Razia Khan stated this in response to the decision of the MPC to retain the benchmark interest rate, Monetary Policy Rate (MPR) at 13 percent.

She said, “The overall sense one got from the MPC  is that policy might still change in the near future, but it is difficult to predict how – the FX market may or may not be liberalised, banks may or may not be compensated for some of the CRR sterilisation, policy rates may or may not be cut” In addition to retaining the MPR at 13 percent, the MPC at the end of its meeting on Friday also retained the 31 percent Cash Reserve Ratio (CRR) for banks.

“In consideration of the underlying fundamentals of the economy, the evolving international economic environment, developments in oil prices as well as the need to allow for the unveiling of the economic agenda of the Federal Government, the Committee decided by a vote of 8 to 4 to retain the Monetary Policy Rate at its current level of 13 per cent, by a unanimous vote to retain the CRR at 31 per cent while 4 members voted to remunerate the CRR”, said the CBN Governor, Mr. Godwin Emefiele, in a communiqué issued at the end of the meeting.

Razia Khan however noted that, “Clearly Nigeria is in a difficult position.   Growth is slowing, but with inflation set to rise, it is not obvious that policy can be loosened very substantially.   “The CBN – rather hopefully in our view – expressed optimism that many of the factors driving up prices were likely to be transient and that with the onset of the harvest season, food prices would decline. Similarly,  with improvements in Nigeria’s refining, fuel shortages might ease in the near future.

“We take a somewhat different view.   Despite the recent slowdown in money supply growth, shortages of key items should keep price pressures sustained, in our view.   Given fiscal and external pressures, expectations of a future adjustment in the FX rate will keep inflationary expectations elevated.   Achieving a turnaround in inflation may not be easy.

“In our view, the need for Nigeria to retain its GBI-EM index inclusion still argues for foreign exchange liberalisation at some point.   Until this happens, there will be limited scope for any monetary easing to boost the economy (although the immediate inflationary consequences of foreign exchange liberalisation might also see any meaningful easing deferred).