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A Pause to Reflect from the MPC

Monetary Policy	1651 VIEWS
Monetary Policy
1651 VIEWS

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Monday November 23, 2020 / 10:18 AM / by FBNQuest Research / Header Image Credit: Central Banking

Today the monetary policy committee (MPC) holds its latest meeting. It created a shock two months ago with a 100bp rate cut but we feel that this time it will revert to pause mode and opt for 'hold'. The committee meets with access to the national accounts for Q3'20, which have just been released by the National Bureau of Statistics (NBS). The economy contracted, as universally expected, for a second successive quarter, so we can legitimately talk of Nigeria in recession. The contraction of -3.6% y/y was better than our projection of -4.7%, which, in turn, was less brutal than other forecasts in circulation. The improvement (from -6.1% y/y in Q2) reflects the lifting of domestic restrictions on movement and, to a lesser extent, better external demand. We will look at the GDP figure more closely in tomorrow's daily macro note.

The CBN has a mission to achieve price stability. The y/y headline rate has now increased for 14 successive months, to 14.2% in October. The majority in the committee voted for easing and overlooked the inflation numbers in September. The rate has gathered momentum since the last meeting however, and a repeat decision now is surely unlikely.

While not formal inflation targeting, the CBN has a reference range of between 6.0% and 9.0% y/y for the headline measure. This has not been attained since April '15 and, even if we were to apply the range to the core (non-food) measure, not since October '19.

There are some disturbing trends in evidence. We have not seen the customary positive boost from the main harvests this year. Further, food price inflation of 17.4% y/y is its highest since February '18 and is running ahead of imported food inflation.

We hear the argument from the back of the room that rising inflation is the result of structural and supply-side factors beyond the influence of monetary policy. The MPC sometimes makes this point and we have a lot of sympathy with it. Yet we cannot forget the reference range, not that it is mentioned often by policymakers, and the CBN's mission.

Among the personal statements by committee members following the last meeting, we noted isolated references to increases in monetary aggregates and to improved credit flows to the economy as grounds then for a 'hold' (Good Morning Nigeria, 10 Nov. '20). We will doubtless be updated on the trends in the communique and may be guided as to any further success resulting from the CBN's hikes in the minimum loans-to-deposit ratio.

The CBN contributes to the credit flows to the real economy through its expanding development finance role. We expect to be informed on the rate of disbursements from its various agricultural and other credit interventions, both those that predate the Covid-19 virus and those launched in response to it.

The communique is unlikely to focus on the fx regime. This is CBN territory (although the top ranks of the central bank are well represented on the committee). We do not see signs of fluidity in policy. There is a little more supply of fx at the investors' and exporters' window but not on a scale to transform availability. Foreign portfolio investors, remitters of dividends and fees under service agreements, and others in the queue have to be patient.

We should recall that the surprising rate cut in September was a majority vote of six to four. Three dissenters voted for an unchanged stance, and the fourth for a 50bp reduction in the policy rate.

This acts as further support for our expectation that the committee will leave its stance unchanged. Additionally, its favoured default position is wait-and-see to assess the impact of previous policy action(s). To restate our view after the release of the October inflation report, the MPC would have to perform some impressive gymnastics if it is to vote for another cut.