20, 2020 10:00 AM / by FBNQuest Research/ Header Image Credit: Phocus Wire
The monetary policy committee (MPC) holds a virtual meeting today in Abuja. The consensus among analysts in May was that there would again be no change. Yet the committee produced a majority vote for a 100bps reduction in the policy rate to 12.50%, and we should add that the minority wanted additional easing. Members' personal statements subsequently pointed to their acute awareness of the accommodative stance of the vast majority of MPCs and central banks elsewhere (Good Morning Nigeria, 26 June 2020.) Today's question is whether we get further easing.
The committee's feeling for the current growth trend will be pivotal. In May its sense was that the then forecasts of the IMF and the FGN of -3.4% contraction this year were overly pessimistic. In the committee's view, these projections did not fully allow for the recovery in the oil price, which has since continued, or for the CBN's firm response to the Covid-19 virus in the form of new credit interventions and rate reductions on all its facilities. Its position in May was that the economy would return to growth in Q4 2020.
If the committee's thinking is broadly similar, a rate cut becomes less likely.
We also need to keep an eye out for any update on lending volumes. In May the committee reported that total credit to the economy had grown by N3.1trn or 20.5% since the CBN started to tighten its loan-to-deposit ratio (LDR) in July 2019. This is possibly the most successful CBN policy in recent years, and, if we are told of further robust progress today, a rate reduction again looks less likely.
The third area for our attention is the trend in inflation. With Friday's report for June, the headline rate has now increased y/y for ten successive months. Food prices have been the principal driver as the rate has picked up by about 150bps over the period. There have, however, also been some pressures on the core measure, and these include several we can tie directly to Covid-19 and the partial lockdown (hospital charges, pharmaceuticals and passenger transport by road). The committee's opinion is that the causes of inflation are both monetary and supply-side.
In May it stressed the fact that price stability was the CBN's "primary mandate" yet argued that it could still deliver monetary easing. Another reduction today at a time of continuing rises in domestic prices would require it to repeat this argument. It would also push the policy rate firmly below inflation. Unorthodox certainly but we could point out that yields on all FGN market debt (if not banks' lending rates for the real economy) are negative in real terms.
Another cut would be tempting and in line with the decisions of the MPC"s counterparts across the world. Our hunch is that the committee will opt for a wait-and-see stance this time.