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
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
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
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.
- LDR Policy:
Over One Year After, Where Are We?
Policy Response in Emerging Market Economies: Why Was it Different this
of the CBN's Development Finance
- Slowdown in
the Expansion of PSCE
Statements By The MPC Members At The 132 MPC Meeting of Sep 21-22, 2020
Surprise Rate Cut: Limited Impact on Credit Growth
- LDR Policy:
Plausible But Insufficient to Stimulate Growth
- Banks Lend,
the CBN Pushes Forbearance
Liquidity Expected to Dampen Impact of Lower Rates
Implications of MPC's 100bps Policy Rate Cut
- CBN Communique
No. 132 of the MPC Meeting - Sep 21-22, 2020