Nigeria – Central Bank Will Pursue Gradual Easing Cycle


Thursday, November 09, 2017 11:55 AM / BMI 

BMI View:
The Central Bank of Nigeria will pursue an easing cycle over the coming quarters in an effort to offer further stimulus to growth after the economy made a relatively lacklustre emergence from recession in Q217. That said, the persistence of high inflation will see cuts to the central bank rate proceed at only a gradual rate. 

We believe the Central Bank of Nigeria (CBN) is likely to pursue looser monetary policy over the coming quarters as economic growth makes only a slow recovery. In its most recent communique following the monetary policy committee's September meeting, the CBN highlighted a desire to offer monetary stimulus to the economy that could complement the government's fiscal measures.


Data from the National Bureau of Statistics found the economy grew by 0.5% y-o-y in Q2, and while this was a considerable improvement from the five consecutive quarters of negative growth that had been recorded previously, it was still below expectations, and has led us to revise down our short-term forecasts (see 'Quick View: Disappointing Recovery Prompts Modest Downward Revisions', September 5).


For much of 2017, we believe the persistence of high inflation (averaging 16.9% y-o-y between January and August) limited scope for cuts. However, with inflationary pressures likely to ease over the coming quarters, we believe the bank will have the room needed to implement looser monetary policy. Inflation in most components of the consumer price basket has been in steady decline over the past 12 months, but food prices have continued to tick up in response to poor harvests in the region, keeping headline inflation elevated.


As weather conditions improve, we believe headline inflation will move lower, reducing the risks associated with any premature move towards looser monetary policy. At the time of writing, we forecast that the bank will cut rates to 13.5% at their final 2017 meeting in November (from 14.0% currently), and will continue with its easing cycle through 2018, leaving rates at 12.0% by year-end.   

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Currency Risk Will Encourage Caution

While we believe monetary conditions will become more conducive to looser policy in the coming quarters, we nonetheless expect the CBN to adopt a relatively cautious stance when it comes to making cuts. Increasing oil output in 2017 following the cessation of pipeline attacks which had been carried out by the Niger Delta Avengers (an insurgent group based in Nigeria's oil-producing south-east) has offered a substantial boost to the naira as valued in the parallel exchange rate.


The CBN continues to manage a hard peg of the naira on the official exchange rate, but both the parallel rate and the free-floating NAFEX window that has been made available to portfolio investors have strengthened against the US dollar, contributing to more stable inflation.


That being said, the recent spate of currency strength is highly exposed to Nigeria's external accounts, and another outbreak in pipeline attacks could soon see the unit sell off again as export revenues suffered. In such an event, inflation would likely once again begin to accelerate as the cost of imported goods and services rose. These risks inform our view that the central bank will cuts rates only slowly, out of concern that more dovish policy could exacerbate any potential currency weakness. 

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Source: CBN, BMI 

Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

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