At the May 2023 Monetary Policy Committee meeting of the CBN, the MPC unanimously voted to :
• Increase the MPR by 50 basis points to 18.5%.
• Maintain the MPR’s asymmetric corridor at +100 / -700 basis points.
• Keep CRR at 32.5%.
• Maintain a liquidity ratio of 30%.
The MPC underlined that legacy and emerging uncertainties continue to cloud the overall outlook for both the global and domestic economies. In most established and emerging economies, output growth has remained sluggish, while inflation has remained elevated and over target. The committee identified several dangers, including the risk of contagion from the US banking crisis, the ongoing Russia-Ukraine issue, and rising tensions between China and the US.
Concerning the home economy, the MPC stated that available data and forecasts for key macroeconomic indicators indicate that growth would continue in 2023, but at a slower rate. However, instability, high energy costs, and growing debt servicing costs would continue to be economic shock drivers.
The committee stated that the equities market’s decrease can be ascribed to the lull following end-of-year activities by numerous corporations on the exchange. Furthermore, the mild fall in external reserves indicates poor accretion to reserves from oil exports, according to the report.
The MPC emphasized the banking system’s continued stability, as the liquidity ratio climbed to 45.3% but remained over the prudential limit of 30%, while the capital adequacy ratio decreased to 12.8% (still within the prudential limit of 10 – 15%). Furthermore, the NPL ratio rose to 4.4% in April ’23, falling short of the prudential guideline of 5%. The committee stated that continued vigilance is essential to protect the banking sector from potential spillover effects caused by internal and external shocks.
The MPC stated that increases in headline inflation are primarily due to non-monetary variables beyond of the CBN’s authority. However, the committee noted that easing or holding rates would undercut the benefits made by past rate hikes, as the economy remains vulnerable to rising inflation in the short term. Furthermore, easing would extend the negative real interest rate margin, leading to greater currency depreciation.
As a result, tightening was required to offset the negative impact of growing inflation on real income. The MPC believes that tightening would signal confidence in its monetary policy’s ability to handle high inflation and prevent further accumulation of aggressive demand. To read the full report, click here. SOURCE: Coronation Merchnat Bank