MPC to Maintain Status Quo as Economic Metrics Lean Towards Growth


Thursday, July 20, 2017 5:39 PM /FSDH Research                                                         

The fourth Monetary Policy Committee (MPC) meeting for the year is scheduled to hold on the 24th and 25th of July, 2017. The Committee will convene to assess the current state of the Nigerian economy and thereafter reach a resolution on the use of its key monetary policy tools as it relates to the achievement of its objectives. 

In this report, we review key events that have shaped the global economy, as they relate to global growth outlook and the resultant impact of these on the Nigerian economy. Furthermore, we assess the Nigerian economy so far in 2017 with a focus on key economic and political indicators, financial market performance as well as our expectations of the MPC’s considerations and consequent decision.  

The gains recorded in the FX market and the increased level of foreign inflows in the year thus far signal the continued effort of the central bank at ensuring price stability. Also, the improvement in economic metrics, alongside the fiscal expansionary policies is expected to augur well for economic recovery.  

In the light of this, we expect the MPC to maintain status quo, as a deviation from this current stance may alter the objective of attaining price stability and negate the positive strides recorded towards economic growth. 

International Economies & Developments  

Fed Rate Hike to Spark Capital Flight  

In June 2017, the US Fed hiked rates for the second time this year to curb the expected inflationary pressures. The rate was hiked to 1.25%, despite inflation falling to 1.9%. The hike was linked to the pick-up in the growth of the US economy following a boost in US exports on the back of stronger global growth.  

Also, the Fed’s expectations of healthy medium-long term growth also stems from the fall in unemployment rate to a 16-year low of 4.3% as at May 2017. Given that one more rate hike is expected before the end of the year, we posit that the committee will consider the impact of the further narrowing of the interest rate differential between the US and Nigeria.  

Furthermore, the likelihood of capital flight from the emerging markets to the developed economies have been heightened by the recent improvements in the Eurozone’s economic metrics amidst the receding political uncertainties in the region.  

Although, the ECB is expected to maintain its accommodative stance in the short-term, we do not rule out an upward revision in its policy rate upon economic improvement broadening.  

In the UK however, the Bank of England’s quantitative easing policies are expected to be sustained. After the conservative’s party’s loss of the parliament majority in June, increased uncertainty permeated the UK economy.  

In light of this we expect the BoE to maintain their expansionary stance to steady the economy’s growth especially after the weaker than expected growth recorded in Q1:2017.  

Overall, we expect that the MPC in its consideration of growth expectations for the advanced economies particularly as it relates to the Fed rate hikes and the moderation political tensions in the EU, will elect to retain the rates at the current level or tighten them to maintain a wide interest rate differential. 

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