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The MPC Set to Hold its Fire This Week

Monetary Policy	1946 VIEWS
Monetary Policy
1946 VIEWS

Monday, July 22, 2019 / 08:48AM / By FBNQuest Research/ Header Image Credit: Channels TV

The monetary policy committee (MPC) holds its latest meeting today and tomorrow in Abuja. In March nine members out of eleven voted in favour of easing and in May nine voted for no change in stance, with two supporting a rate cut of 25bps.

By its own logic, which it has not explicitly revised, the committee’s inclination should still be in favour of accommodation. According to that logic, now that exchange-rate and relative price stability has been achieved, its focus should be to support growth and employment. The global backdrop, however, may well prompt another no change decision this week.

The change in direction by the US Federal Reserve has proved a welcome boost to emerging/frontier bond markets. For foreign portfolio investors (FPIs), Nigeria offers the additional advantages of high returns and a stable fx rate at the investors’ and exporters’ window (NAFEX).

Despite this change in stance by the Fed, which is likely to cut its benchmark rate as early as this week, the MPC could point to global trade tensions as a reason to embrace caution. It is unclear where the ‘truce’ between the US and Chinese presidents at the recent G20 meeting in Japan will lead. Nigerian policymakers will be alert to any downside for China, which is its leading source of imports as well as a sizeable investor.

The MPC argues that high returns on naira debt instruments are essential to keep FPIs locked into local markets, and thereby underpin official reserves and the exchange rate. We could debate whether a fall of, say, 100bps, in those returns would materially affect investor sentiment, and indeed the extent to which the monetary policy rate (of 13.50%) guides returns.

The communique may have something to say about the lending of deposit money banks (DMBs) to the real economy. In the past month the CBN has ruled that they must maintain a minimum loans to deposit ratio of 60% by end-September and has cut the ceiling on their individual daily access to its standing deposit facility to N2bn. Both measures are designed in part to spur real economy lending, and more could follow. Several MPC members have strong views on the subject (Good Morning Nigeria, 05 July 2019).

In passing we should mention domestic inflation, which has settled within a range of between 11.00% and 11.50% y/y since June 2018. We do not see the headline rate breaking out of this range in the next two months, and note that CBN in-house forecasts project a level of about 11.00% in October. The CBN has a (lower) reference range but is unlikely to attain it in a hurry due to well documented, supply-side constraints.

Finally, we do not expect much commentary in the communique on Tuesday on the CBN’s exchange-rate policy. Since the re-election of Muhammadu Buhari and his reappointment of Godwin Emefiele as governor, the existing policy should be taken as a ‘given’ provided that the oil price does not tank and that the FPIs do not therefore rush for the door marked exit.