The monetary policy committee (MPC) yesterday voted unanimously to hold its policy rate at 11.50% and left its other parameters unchanged. This was the expectation of the vast majority of analysts surveyed including ourselves. The committee notes with alarm the spike in headline inflation, which it attributes to well-known legacy issues as well as rises in the retail price of gasoline and in the electricity tariff. In its communique, it argues that inflationary pressures will moderate as output rebounds, supported by the monetary and fiscal stimulus on offer. Two months ago, it cited a specific timeline (on the basis of CBN house forecasts) for a peak in the headline rate in Q1 '21.
The committee dwells upon the CBN's efforts to encourage lending by the deposit money banks (DMBs) and its development finance activities, as anticipated (Good Morning Nigeria, 25 January '21). We learn that gross aggregate bank credit increased in December by a further NGN770bn to NGN25.0trn.
We also learn that the CBN has disbursed NGN2.0trn through its various facilities in response to the Covid-19 virus. The committee wants more of the same and has a preference for the targeted credit facility aimed at households and SMEs.
Nigeria's total stimulus to date has been a "paltry" 4.0% of 2019 GDP according to the communique, which compares with 10.0% in India, 11.5% in China, 12.6% in South Africa and 28.4% in the US. (The data is unsourced.)
The committee advises against another "wholesome lockdown" of the economy for fear of undoing the positive impact of the stimulus already provided. This is a debate taking place across the world. We would support the MPC's advice on the grounds that both the cost of the measure and the damage to a fragile economy would be huge.
The non-performing loans ratio deteriorated from 5.9% at end-November to 6.0% one month later. The committee observes that this is not a surprise in the current environment.
There is a little more commentary on the fx regime than usual but nothing that points to a change in direction. Rather, the committee suggests areas where the CBN and the FGN may be able to boost supply within the existing arrangements and ease pressure on the naira exchange rate. These are international money transfers, diaspora remittances and non-oil exports. This would be an exercise in fine-tuning to improve the workings of the system in place.
We have noticed a growing view among analysts that the MPC will revert to an "orthodox" monetary policy this year by tightening in response to the inflation trends. The view is popular in non-Nigerian institutions and overlooks in our view the focus of the CBN (and the committee) on improving access to credit at affordable rates to help pull the economy out of recession.
Our reading of the communique is that tightening was considered and quickly dismissed. We feel that the committee currently has an easing bias and may make a token cut in the policy rate later this year if inflation data and expectations permit. It thought about easing principally for the encouragement of credit extension but argues that a reduction could worsen inflation and negative real interest rates.
A summary of global stimulus packages by the committee includes increases by central banks in their Ways and Means limits to support economic recovery. It may be relevant that a prominent ratings agency has recently queried the CBN's increasing use of such a facility for budget deficit financing.