The monetary policy committee in Nigeria voted to hike the monetary policy rate by 2 percentage points to 14%, surprising markets who expected no change. Inflation is high and rising in Nigeria, with negative real interest rates, so the committee prioritized price stability over economic growth. By raising rates, the central bank aims to support the recently liberalized foreign exchange policy and improve foreign inflows to boost liquidity. Further rate hikes are expected as inflation climbs into the early 20s by the fourth quarter of 2016.

1. Nigeria: Surprise 2ppts rate hike to 14%; positive for NGN
 The monetary policy committee (MPC) surprised the marketby voting to hike the monetary policy rate (MPR)
by 2ppts to 14%. We were a little more hawkish than the MPC turned out to be – we were expecting a 3ppts
rate hike. The consensus view was an unchanged MPR.
Figure 1: Policy rate vs inflation
Source: Central Bank of Kenya; Kenya’s National Bureau of Statistics
 The MPC also voted to keep the cash reserve requirement (CRR) unchanged at 22.5% (and the liquidity rate
flat at 30%).
 Governor Emefiele spent quite a bit of time explaining that the MPC had dedicated a considerable amount of
time debating on what to prioritise:growth or inflation. The split in the vote demonstrates the vote was not a
clear cut one. Five voted to hike, and three voted to keep the policy rate unchanged.
 Those that expected no change in the policy rate were also influenced by the May MPC meeting when the
committee voted for a 1ppt rate cut, to 12%. However, the timing was important. This meeting was days
after the release ofthe negative growth number for 1Q16, which was the first confirmation that the Nigerian
economy was headed for a recession.
Figure 2: Real GDP growth, % YoY

2. Source: Kenya’s National Bureau of Statistics
 Another reason why we saw the MPC favouring price stability over growth at today’s meeting, is
because of the decision made last month to liberalise FX policy. We saw this as a market-friendly
move. That and the loosening of the hold on the interbank rate over the past 10 days, following the central
bank’s roadshow, added weight to our view that the central bank was returning to more orthodox monetary
policy.
 Whether or not one believes that the current inflation rate is reflecting the parallel FX rate (and that the naira
devaluation on the interbank market should thus have minimal impact on inflation), we all agree that
inflation is uncomfortably high (and rising) and real interest rates are negative. In order to support the
new FX policy and draw FX inflows that would help improve FX liquidity, interest rates need to increase.
 Growth: The committee suggested that there was not much it could do to avert a recession. So it opted
to act on what it can, which is price stability. It is up to fiscal policy to soften the downturn. Our growth
projection of -0.5% for 2016 is premised on the commencement of the execution of the budget in 2H16
which we think should provide an additional support to growth, that was absent in 1H16, when the budget
had yet to be passed bythe National Assembly and thereafter signed by President Buhari. However, we do
not expect this lift from the fiscus to be meaningful, given that consumption and investment are in decline.
We admitthat there is downside risk to our growth forecastand we will be reviewing it once the 2Q16 growth
number is released.
 Outlook: Although the MPC instituted a bold rate hike, short term interest rates remain negative (it’s why we
were looking for 3ppts). As we see inflation climbing into the early 20s by 4Q16, we expect further rate
hikes. A higher interestrate environment is positive for the fixed income market. This should help draw the
foreign investment needed to improve FX liquidity in the interbank market.
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