The Monetary Policy Committee (MPC) closed its latest meeting yesterday, leaving its policy rate of 11.50% and other parameters unchanged. This was widely expected including by ourselves (Good Morning Nigeria, 05 May '21). The verdict was unanimous whereas in March three of the nine members present had voted for a rate hike. The committee cites reasons not to tighten and not to ease, and therefore concludes that it was best to analyse the impact of the policies already in operation. It would not tighten because the post-COVID economic recovery was decidedly "fragile" and because higher rates would undermine the CBN's plan to make low cost credit available.
Nor would it ease because inflation remained very high (despite a slightly better number in the April report). The achievement of price stability, which now appears distant, is a core objective of the CBN although the committee notes in all honesty that supply-side factors (such as insecurity and infrastructural deficits) have become the main drivers of inflation and cannot be influenced by monetary policy.
On the global landscape, the most interesting observation of the committee is that monetary policy normalization in advanced economies could kick off in Q4 '21. Not the US and not the Eurozone we suggest but elsewhere in G7 such is distinctly possible.
The modest improvement in inflation in April was driven by food price trends, and the committee has no hesitation in giving some of the credit to the CBN for its "massive interventions" in agriculture and other sectors to boost food supply and create employment.
The FGN has a role to play by tackling insecurity and building/restoring physical infrastructure. Their joint efforts are expected to improve the supply of goods and services, and therefore contribute to the easing of inflationary pressures. There is no inflation forecast in the communique: for the record, we see the headline rate at 16.5% y/y at end-year.
Any suggestion that the CBN is to diminish its role in development finance and hand over to the private sector is fanciful. We may have views on the productive value of some of the CBN's interventions but we have to accept that many of them are in territory that the commercial banks would not enter. More likely, the role will be expanded.
The committee looks at the FGN's record on COVID-19 and notes approvingly the steps taken in support of its target of vaccinating 70% of the population.
There is a strident appeal for fx restrictions to protect domestic production. These could be termed administrative measures or capital controls. This is a familiar path for the CBN, which we saw in its list of items subject to import controls (initially 41 and then expanded).
The communique also calls on the FGN to tap the Nigerian diaspora for funding for specific infrastructure projects. The FGN did raise USD300m from the issue of a diaspora bond for general purposes that matures in Jun '22. It could repeat the exercise or issue other debt instruments as governments and central banks in other jurisdictions have done.
In the Q&A session at the end of the press conference, we understand the governor confirmed that the official exchange rate had become the NAFEX (I&E) rate, which the CBN yesterday showed for the first time on the home page of its website. There are still several rates in operation but their number has decreased and we have also moved towards unification with the narrowing of the differentials. The series of small adjustments to the rates that we see ahead could conceivably be viewed as a form of crawling peg.
Without a dramatic improvement in the data on inflation and growth, which is not our expectation, the chances of another 'no change' verdict in two months' time are high.