Post-November 2020 MPC View: Back to the Committee's Favoured Stance

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Thursday, November 26, 2020   /10:30 AM / by FBNQuest Research / Header Image Credit: Nigerian Newspaper Online

 

  • A return to a wait-and-see position: The monetary policy committee (MPC) left its policy rate of 11.50% and other parameters unchanged on Tuesday. This was our expectation. The vote was unanimous on all counts among the ten members participating. The committee rejected tightening for fear of the impact on growth and credit extension, and loosening for the perceived boost to liquidity and inflation.
  • A challenging primary mandate: Steady rises in inflation over more than one year are the consequence of structural constraints that push up food and non-food prices. The FGN therefore has the means, if not all the required resources, for the CBN to meet its primary mandate of price stability. Inflation is expected by the CBN to moderate in Q1'21.
  • Hopes of recovery by year-end: The discovery of Covid-19 vaccines has created some optimism around the global economy, and the official take on the domestic economy this year and next is more confident. The communique sees a return to positive growth (end of the recession) this quarter (Q4). Rising credit extension by banks (under pressure from the CBN) and its expanding role in development finance are important pillars of this expected recovery. In our view Q2'21 (or conceivably Q1) should bring the turning point for the economy.
  • Fx thinking unchanged: There is no mention of exchange-rate policy in the communique. The assumption is that the current regime is appropriate, which tells us again not to expect a change in direction.
  • Rates on FGN paper to please the FGN if not investors: The returns on FGN paper have crashed. Any conventional relationships with inflation and the policy rate have vanished although the DMO and the federal finance ministry will be pleased with the impact on borrowing costs. We struggle to see any significant retracement, given market and domestic investor dynamics.

 

FGN bond yields (%)

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Source: NBS, FBNQuest Capital Research

 

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