In brief
- Nigeria’s Monetary Policy Committee (MPC) showed its relentless hawkishness at the September MPC meeting with a unanimous vote to hike the Monetary Policy Rate (MPR) by 50bps to 27.25%, against the market and our expectation of a “Hold” decision. In view of the continued growth in Naira liquidity and recent spike in FX demand, the Committee further increased the Cash Reserve Ratio (CRR) of Deposit Money Banks (DMBs) and Merchant Banks to tighten interbank NGN liquidity.
- The MPC’s use of the phrase “severe concerns” to describe its feeling about the rising core inflation suggests to us that the authorities are far from declaring victory on inflation, despite the welcome decline in the headline rate. We took a closer look at the evolution in the index level for core inflation and observed a rapid increase in core CPI during 8M2024 (+12.1pts/month) compared to the same period of 2023 (+7.7pts/month).
- The MPC noted a strong correlation between the disbursements from the Federal Account Allocation Committee (FAAC) and liquidity levels in the banking system as well as its impact on the exchange rate. For the August 2024 FAAC release (which was likely disbursed this week), we note an allocation of NGN 1.2trn which boosted banking system Naira liquidity. This likely supported the MPC’s observation of a strong correlation between FAAC releases and Naira liquidity, thereby intensifying its full-court press on Naira liquidity with the hike in CRR to 50.0% for commercial banks and 16.0% for Merchant banks.
- The Committee also insinuated fiscal risk emanating from the widening budget deficit, despite expressing optimism against the use of Ways & Means financing by the Federal Government. Given the Central Bank’s preference to restore positive real interest rates to attract foreign capital, we foresee sustained hawkishness in the near-term. However, we anticipate moderated pace of rate hikes with a more likely possibility of staying on “Hold” for longer.
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