Wednesday, May 25, 2016 2:27PM/FBNQuest Research
No change from the meeting
Confronted with rising inflation and shrinking output, the monetary policy committee (MPC) yesterday left its stance unchanged. We suspect that it was minded to announce a hike to maintain a positive policy rate in real terms until the release of the GDP data. It noted that its options were limited “in a period of stagflation”. A theme of the communiqué is that the committee has had little influence over adverse macroeconomic development although it did warn of a possible recession in July 2015.
Economy now expected to shrink in Q2 (and beyond)
The contraction in GDP was attributed to what the committee viewed as legacy issues beyond its control. These are mostly structural although one could argue it could have influenced the passthrough from fx. It sees further GDP contraction in Q2. We now expect negative growth over the full year.
The fiscal to blame
The communiqué is adamant that the FGN’s fiscal shortcomings have led to the contraction, citing recurring delays in budget passage and sign-off.
Exchange-rate flexibility to come
The one decision, which we anticipated, was the move towards a second fx window. This could reserve the existing window for critical transactions, which we would view as a large step forward. A clue lies perhaps in its endorsement of the recent liberalization of fuel prices.
FGN bonds to drift upwards
Rather than respond to the surge in domestic inflation, we now see monetary policy on hold this year in the face of declining output. There is a large deficit to finance and the communiqué noted a 108% annualised rise in credit to government. We see FGN bond yields in the mid-curve touching 14.00% in the weeks ahead.