InsightsMacroeconomic updateMonetary PolicyNigeria

22 May 2024

Nigeria MPC Update: Taking no prisoners

In brief

  • Nigeria’s Monetary Policy Committee (MPC) remained steadfast in its hawkish policy stance during the May 2024 meeting, despite acknowledging that the previous policy tightening is beginning to slow the inflation momentum.
  • Against our expectation of a “hold” on the policy rate amidst indications of cooling month-on-month inflation, the MPC showed its resolutely hawkish posture with a 150bps hike in the Monetary Policy Rate to 26.25% (Market expectation: 25.75%). The latest decision takes the cumulative policy rate hikes so far in 2024 to 750bps and emphasized the MPC’s commitment to restore price stability.
  • Evidently, the main drivers of food price pressure are non-monetary and should not ordinarily warrant monetary policy tightening. However, we believe the MPC is focused on taming the potential second-round effects of these non-monetary forces, underpinning its continued hawkish tilt and sustaining the credibility of its commitment to price stability. The persistently strong over-subscription at T-bill auctions also suggests the need for further liquidity tightening.
  • Taking stock of the FX market reforms implemented so far, we think the monetary authorities have an eye on strengthening remittances to augment the target rebound in foreign portfolio inflows as key sources of FX market supply. In our view, the unification of the multiple exchange rates and elimination of the premium on parallel market rates resolves the first obstacle to remittance inflows. We also think the licensing of 14 international money transfer operators (IMTOs) is geared towards enhancing competition and eliminating the second obstacle to remittance inflows through official channels as competition trims transaction cost. However, we expect the benefit to be a medium-term outcome rather than a near-term impact. In the near-term, we view foreign portfolio inflows as the more attainable outcome on the back of higher interest rates and market-determined FX rates.

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