Wednesday, September 27, 2017 / 8:42 AM /Vetiva Research
At its penultimate meeting of 2017, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) voted to hold all key monetary policy tools at their previous levels. Specifically, in line with Vetiva and Consensus expectations, the committee maintained the monetary policy rate (MPR), cash reserve ratio (CRR), and liquidity ratio at 14.0%, 22.5%, and 30.0% respectively. The asymmetric corridor around the MPR was also maintained at +2%/-5%. Defending the decision, the MPC highlighted stubborn 2017 inflation (January: 18.7% y/y; August: 16.0% y/y) and delicate gains made in the foreign exchange market (FX) as significant deterrents to loosening monetary policy and addressing the high cost of capital in the economy.
At the same time, the CBN Governor reiterated that tightening monetary policy at this time may further weaken aggregate demand, restrict credit growth, and pressure asset quality in the financial sector. In our view, the “HOLD” decision shows an appreciation of the reality that the best course of monetary policy action is to “do no harm” in the interim, preserving FX market gains and permitting the effects of fiscal stimulus to permeate the economy.
CBN underlines cautiously optimistic growth outlook
The CBN Governor emphasised the improvement in Nigeria’s FX market – reflected in c.$7 billion inflows into the “Investors & Exporters” window and 27% ytd increase in external reserves to $32.9 billion in late-September. The apex bank chief further highlighted a marginal increase in bank lending to the private sector in August, a welcome development given the importance of credit growth in spurring Nigeria’s recovery. With fiscal stimulus as the primary driver of economic expansion, healthy domestic oil production and global oil prices were also noted as key in the near-term. However, whilst the CBN is cautiously optimistic about Nigeria’s growth prospects, risks to this outlook come from conservative bank lending amidst still-weak asset quality, a strengthening U.S. dollar, as well as weather challenges and sociopolitical tensions in certain regions of the country.
No change expected until 2018
In presenting its outlook, the CBN may have given subtle forward guidance on near-term monetary policy. The committee suggested that it would monitor the evolution of key economic indicators – GDP growth, inflation, FX – between now and Q2’18 as it considers adjustments to its current policy stance. Whilst this does not suggest that the MPC would wait until its May or July 2018 meeting to alter policy rates, it demonstrates the required patience and understanding of the present conflicting signals of economic indicators. Moreover, it is strongly suggestive of another “HOLD” decision at the final MPC meeting of the year in November, in line with our view. We expect sticky inflation (on account of food prices) and the expected Federal Reserve rate hike to dissuade any change in monetary policy stance until 2018.
1. CBN Communiqué No. 115 of the MPC Meeting – Sep 25-26, 2017
2. MPC Leaves Policy Rates Unchanged
3. Pre-MPC Commentary - Inflation, FX Considerations Should Stay MPC Hand
4. MPC Preview: Policy Trade-Off Still Favours No Change
5. On hold on a Majority Vote Expected
6. MPC: Advocacy and The Total Eclipse of Analysis
7. Likely Split Decision At MPC, Status Quo To Be Maintained
8. Some Cracks Emerging In The Group of Eight
9. After Recession : A Need for Policy Change?
10. MPC to Hold Rate Steady as Green Shoots of Recovery Emerge
11. Personal Statement by the MPC Members at the 114 MPC Meeting of July 24-25, 2017
12. Growth in Money Supply Falls below Targets
13. Pre MPC Note: Tightening Argument Overriding Despite Strengthening Case for Easing
14. South Africa – Cautious Rate Cuts Ahead, But Risks Finely Balanced