MPC opted for expansionary monetary policy as MPR declined to 12.5% from 13.5%

Monetary Policy Committee (MPC) unanimously voted to loosen the Monetary Price Ratio (MPR) by 100bps to 12.5% and also adjusted the asymmetric corridor to +100/-700bps from +200/-500bps, while the committee left other parameters unchanged, including Liquidity Ratio at 30.00% and Credit Reserve Ratio (CRR) at 27.50%. The decision to adjust the MPR was based on its primary mandate of price stability and the need to support the recovery of output growth as against the recent uptick in inflation and contraction in Q2-2020 GDP. The committee considered some key factors that is likely to exert upward pressure on domestic prices in the near term include: the prevalence of security challenges in the country; adverse weather conditions causing flooding in some farming regions; the increase in petroleum pump price; deregulation in electricity tariff; low crude oil price; and exchange rate adjustment. Although they noted that available evidence does not support the view that the rise in inflation was due to monetary factors.

Headline inflation has continued to creep upwards over the past two months

The Consumer Price Index rose by 13.22% YoY in August, marking the highest inflation rate since March 2018 and 40bps higher than 12.82% recorded in July 2020. The increase in headline inflation was majorly driven by increases in both food inflation and core inflation. Food inflation expanded to 16.00% y/y in August 2020 compared to 15.48% recorded in July 2020, while core inflation also rose by 10.52% YoY (vs 10.10% in July 2020). The committee expressed their concern over the uptick in inflation. They believe the uptick were driven by inadequate state of critical infrastructure, increase in energy cost, disruption to supply chain and adverse weather condition which has resulted in flooding of farmlands. The committee stressed the need for combination of broad-based monetary and fiscal policy measure to curb the rise in inflation and contraction in output growth.

Major concern as output growth contracted in Q2  

Nigeria’s gross domestic product (GDP) contracted by 6.1% in the second quarter of 2020 which vastly underperformed CBN’s growth forecast of -1.0%. The GDP contraction represented the steepest economic decline in Nigeria in over 3 decades and was driven by poor performance of both oil and non-oil sector due to the lockdown to contain the spread of COVID-19. The MPC noted the continued weakness in economic activities as indicated by the manufacturing and non-manufacturing purchasing manager’s Indices (PMI) which is below the 50 index point benchmark, despite rise in PMI for both manufacturing and non-manufacturing which increased to 48.5 and 44.3 index point in August compared to 42.4 and 43.3 index point recorded in July. Although the committee is positive that with the easing of lockdown and gradual resumption of economic activities, the PMI will improve in the short-to-medium term. They also project positive growth output in Q4 2020 or latest by Q1 2021, based on the anticipated positive results from the coordinated and sustained interventions by both the monetary and fiscal authorities.

Key Consideration from the MPR cut

The major consideration by the MPC in cutting the MPR was largely due to downward pressure on growth output and upward pressure on domestic prices. Although, the committee expressed that the traditional tools of monetary policy may not be helpful in addressing current inflationary pressures. Instead, the useful policies will be the supply-side measures implemented by the Bank, that is, reducing MPR will signal to the Deposit Money Banks to lend more to stimulate growth, increase aggregate supply, which should dampen prices in the immediate term. The MPR cut is expected to lower bank’s cost of capital due to recent reduction in saving rate to 10% from 30% of MPR. This will also discourage saving which in return will increase customer consumption level.

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