Tuesday, April 03, 2018 04.18PM /
Vetiva Research
The inauguration of the new Monetary Policy Committee
(MPC) is hugely welcome given the uncertainty around monetary policy since the
start of the year. Despite calls for the committee to hit the ground running
and ease monetary policy, we consider it more prudent for the MPC to hold back
at this time and instead provide forward guidance and greater clarity on their
near to medium-term expectation, in line with global best practice.
In our view (Vetiva), easing at this emergency
meeting would be hasty, particularly as general Central Bank of Nigeria (CBN)
liquidity management is yet to properly signal a shift towards sustained
monetary easing. Therefore, our recommended approach would be for the MPC to
provide clarity on rate path and the CBN to follow suit through its Open Market
Operations (OMO) in the coming weeks. This should pave the way for a stable
shift towards looser monetary policy in Nigeria.
One eye on Fed activity, but little
change there
The United States Federal Reserve (Fed) raised
interest rates by 25bps to 1.75% at their March 2018 meeting, lifting the
benchmark rate 100bps above its level in March 2017. The PCE index, the Fed’s
favoured inflation gauge, rose to 1.6% y/y in February, the highest in a year
but still below the 2% target. Furthermore, the Fed revealed more bullish
expectations for the labour market and economic growth, as well as a more
hawkish tone for medium-term interest rates amid impending fiscal stimulus.
Whilst these developments point towards further monetary tightening in the
U.S., we note that not too much has changed; after all, the Trump fiscal boost
was expected in 2017 and simply looks to be coming a year later than
anticipated. Still, monetary tightening in the U.S. would continue to pose a
threat to capital flows to emerging markets. The upside for Nigeria is the
recent improvement in inflation and risk environment which is positive for the
risk-adjusted return of investing in the country.

Inflation declines, but not in the way
imagined
Despite the steep fall in headline inflation (from
15.4% y/y in December 2017 to 14.3% y/y in February 2018), underlying
inflationary trends are more sticky. Month-on-month headline inflation has
remained marooned within the 0.75%-0.80% range for the last six months while
underlying annual inflation (stripping out volatile food and energy prices) has
fluctuated within a 45bps range in the last eight months – both of which are
peculiar for a country with historically volatile inflation. In some ways, this
is not so surprising as the main drivers of moderating inflation have been base
effects and softening food prices. Moreover, these look to be respectable
inflation levels compared to the last two years. Nevertheless, the broader
picture warns that we are not out of the inflation woods and we are yet to see
a marked change in underlying inflation. February numbers showed stronger signs
of moderation – largest drop in core inflation since June 2017 but the
medium-term trend cautions against overly aggressive easing.

Political and structural constraints
should not deter committee
The MPC decision is clouded by two factors. The first
consideration is of higher inflation at year-end given the likelihood of a
minimum wage hike, increased election spending, and waning base effects. This
outlook may impose a time constraint on monetary easing as the MPC may need to
re-pivot to tackle runaway inflation. The second consideration is the continued
doubt over the efficacy of monetary policy transmission in the Nigerian
economy. The latter issue should be helped by a shift in federal government
debt policy towards external borrowing (to reduce crowding out) and improvement
in Nigeria’s credit risk environment (through the push for credit bureaus and
collateral registries). All things considered, the recommended decision at this
week’s meeting is a “HOLD” with further clarity to be provided on medium-term
monetary policy.
Verdict: Hold
Author
Michael Famoroti of Vetiva Capital Management
Limited can be reached vide m.famoroti@vetiva.com
Plot 266B Kofo Abayomi Street | Victoria Island |
Lagos | Nigeria| +234-1-4617521-3

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