MPC Preview: Tough Times… Limited Options

The outbreak of Covid-19 has tested the flexibility of monetary authorities across advanced and emerging economies. They have adopted accommodative policies, involving varying adjustments to benchmark interest rates and introduction of quantitative easing in every sense of it. Further to ensure easy transmission of the adjustments to the benchmark rates, monetary authorities have lowered the countercyclical buffer rates of commercial banks, as seen in the UK. Largely, the attention of monetary authorities has been focused on limiting the impact of the global shocks on economic growth by supporting consumption and limiting the impact of a slowdown in economic activities on operation of businesses.

In Nigeria, the CBN is between a rock and a hard place with limited policy options available. After initiating series of growth centric and balance sheet management policies over 2019, ongoing shocks are seemingly about to redirect the apex bank’s focus strictly to price and foreign exchange stability. Although, we see limited impact of CBN’s action on price stability given that they are largely reflecting structural factors, like the breakup of supply chains and the pending border closure. Reserve and FX stability on the other hand will critically test the apex bank’s resolve and challenge the conflicting decision of growth and FX management. At the end of the Monetary Policy Committee meeting on Tuesday, we favor the committee maintaining status quo on key policy rates and pronouncement of some administrative measures to limit pressure on the reserve.