Tuesday, March 21, 2017/10:42 AM /ARM Research
Today, the Central Bank of Nigeria (CBN) commences its two-day monetary policy meeting facing a changing economic picture across the external and domestic landscape.
On the global front, monetary conditions are getting tighter after the US Federal Reserve followed up with another 25bps hike in its policy rate to 0.75 – 1.0% after an increase of similar magnitude in December 2016.
Elsewhere, while the ECB and BOE similarly left rates unchanged, rising inflation outlook resulted in hawkish forward guidance.
On the domestic terrain, economic indicators are starting to turn as well, after the National Bureau of Statistics reported a 94bps contraction in headline inflation to 17.78% YoY in February 2017 – the first decline in 15months.
The moderation in inflation was a fall-out of high base effects from the chained CPI series which underpinned a sharp drop in core inflation and masked pressures on food inflation.
On the currency front, after a change of heart in February, the CBN announced a raft of FX policy measures including the relaxation of 60:40 FX allocation rule in favour of manufacturing companies, reduction of the tenor on its currency forwards to 60-days (vs. 180-days previously) and a desire for greater intervention to clear unfilled orders in the interbank FX market.
Following the announcement, the CBN sold $1.8 billion into the interbank market, with the improved FX liquidity causing an appreciation in the USDNGN at the parallel market rate (-15% to N448/$1) while the interbank rate has been stable at N306/$.
The increased CBN activity across FX markets reflects steady reserve accretion which hit an 18-month high of $30billion in early March.
Lastly, though lagging, real GDP growth remained in negative territory (-1.3% YoY) though represented a slowdown from the 2.24% YoY contraction registered during the preceding quarter on the back of a slower contraction in oil GDP (- 12.4% YoY).
In all, following the FPI exodus over 2016 and continued foreign reticence towards naira assets, we think offshore developments look distant in the scheme of things and that of interest at the MPC would be how the developments in the domestic landscape tally up to CBN’s domestic dashboard.
The ‘meeting’ before the meeting
Having hinged its current tightening stance on keeping real yields positive, the recent improvement in CPI should translate into some form of easing.
However, amidst strong MoM reading, persisting currency concerns, and the inorganic nature of reserve accretion (largely swaps and other official receipts), we think a rate cut would appear pre-emptive at this stage.
That said, over the weekend, Nigeria’s economic managers met in a bid to ‘harmonise policy perspectives’— the first of its kind.
Present at the meeting were the CBN governor and respective ministers of the Ministries of Finance, Budget and National Planning, and Industry, Trade and Investment.
Post the meeting, comments from the fiscal side which affirmed widely held views about greater FGN borrowings pointed out the need for an unconventional approach in tackling the current economic malaise.
Though both sides avoided commentary on likely rate direction, to our minds, the meeting, suggests a stronger political will to tilt monetary authorities to tow an accommodative stance already in place on the fiscal leg.
As we noted in our report last year - CBN monetization of fiscal deficits: Above the law? - the end of the back-door budget financing by the apex bank must have triggered the call for collaboration.
Though a coincidence, we think the decline in inflation, would have provided an opportune window for the fiscal side to broach the subject of easing at the policy retreat.
CBN OMO activity hint at a static MPC
Despite the inflection in CPI inflation, CBN’s activity across money markets suggests no change in its policy stance. MTD, the apex bank has net issued N66.6 billion while holding its marginal clearing rate static at 18.6% which to our minds signals one of two things.
First, the apex bank still feels the need to keep the returns for holding naira attractive to ward off currency speculation.
Alternatively, given the strong MoM inflation reading, which stemmed from food prices, the CBN could be waiting for a steady stream of data to affirm the declining CPI trajectory. Indeed, looking at developments along the naira yield curve, short end rates have climbed on average 64bps MTD largely driven by sell-offs along the 91-day paper (up 195bps MTD), while bond yields have largely declined (-14bps MTD).
Fixed income markets appear to be pricing in a hold at this MPC, in our views. Notably the declines in bond yields are isolated to tenors beyond one year while the uptick in treasury bill rates are taking reinforcement from CBN’s unchanged OMO clearing rates.
In all, while economic (and political factors) raise prospects for a rate cut, CBN’s own body language points to a retention at the MPC. In addition, we think this MPC meeting should provide strong hints about a dovish twist to monetary policy over the near to medium term.