Although it left its benchmark rate of 11.50% and other parameters unchanged, the last meeting of the monetary policy committee (MPC) in March was notable for the split verdict. Three of the nine members present voted for a rate hike (one of 75bps and the other two of 50bps). From a close reading of their personal statements, we suspect that the committee will again opt for 'no change' later this month. The majority of rate-setting bodies and governments have been faced with a combination of recession and low inflation, which has enabled them to make an orthodox monetary and fiscal response to the COVID-19 virus. Nigeria's combination is different of course, which led one member to declare that orthodox policy tools are redundant and to call for an expansion of the CBN's development finance role. Inflation has now risen for 19 months in succession, and far above what members variously term the "tolerance band" and the implicit target corridor" of between 6.0% and 9.0% y/y.
The committee accepts that the steep rise in inflation is due largely to structural and supply-side factors, rather than demand considerations. Most but not all members make this point strongly. The logical response, one member argues, would be for the FGN to tackle two such factors, namely the insecurity in food growing areas and inadequacies in transport/logistics.
Inflationary pressures may start to ease by mid-year according to CBN staff due to a harvest impact (although we have to say that none such materialized in 2020).
Whatever the trajectory of inflation, we now share the arguments of the three 'hawks' in favour of tightening. They say that the committee must act in view of its principal mission (on price stability) and to demonstrate its awareness of the prevailing negative real interest rates. It should address any monetary influence on inflation, curb fx market excesses and show its good intentions to foreign portfolio investors.
We think that the majority will again resist a vote for tightening this month because of the shared position on the origins of inflation.
We repeat our plea for MPC members to cite recognized measures of credit extension that can be identified in data series. Several are evident in the statements including: credit from banks (increasing by NGN4.56trn over 12 months); gross credit to the economy (rising by NGN5.56trn between May '19 and February '21; total banking sector credit including to the government (growing by 4.0% between December '20 and February; credit to the private sector (increasing by 1.4% m/m to NGN30.6trn in January); and credit to the core private sector (rising by 19.2% on an annualized basis in February).
Surprisingly, just one statement strays into fiscal data. The numbers from February show a rise in total distributed and (FGN) retained revenue from the previous month as well as a moderation in the fiscal deficit and a decline in the total debt service/revenue ratio.
Members cite the latest financial stability report approvingly. They are pleased with the most recent liquidity and capital adequacy ratios for the banking industry, and agree that the small deterioration in the non-performing loans ratio from 6.1% in December to 6.3% in February is acceptable in the circumstances.
One member reports that 85% of "banking creditors" could access loans at interest rates below 15%, another that prime and maximum lending rates had again declined in February.
Finally, we note the striking call from one committee member for the FGN to take a long, hard look at the cost of governance. He added that government bodies have a habit of taking policy decisions that increase governance costs.