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Ten MPC Members, One Shared Outlook

Monetary Policy	2818 VIEWS
Monetary Policy
2818 VIEWS

Wednesday, January 06, 2021 / 09:04 AM / By FBNQuest Research / Header Image Credit: Central Bank of Nigeria

Since the monetary policy committee (MPC) voted unanimously in late November to leave its policy rate and other parameters unchanged, we should not be surprised to find a good deal of common ground in members' personal statements, which the CBN distributed one week before Christmas. The committee settled for its favoured wait-and-see stance, one member adamant that it had few monetary instruments still to deploy. Among the ten statements, we see a shared view that the national accounts for Q3 '20 provide pointers for Nigeria's exit from recession, that the health of the banking industry continues to improve, and that both the CBN's loan-to-deposit ratio (LDR) and its development finance initiatives have contributed substantially to the country's perceived economic resilience.

GDP contraction slowed from -6.1% to -3.6% y/y in Q3 '20. One member notes that 17 of 46 sectors expanded in Q3, compared with 13 the previous quarter, and another that the latest data point to a likely V-shaped recovery. Our analysis would have added that more Nigerians were able to leave their houses, make journeys, and go to offices and factories in Q3 because of the easing of restrictions.

Members draw comfort from the report they received on the banking industry. The ratio for NPLs declined to 5.7% at end-October, compared with 6.1% at end-August and 6.6% at end-Oct '19. One member fairly observes that the CBN's decision to allow banks to restructure their loan portfolios has played its part in this improvement. The liquidity ratio of 35.6% at end-October was well above the threshold. Another comments that the ratios for returns on equity and on assets compare favourably with peer countries.

The LDR has helped to drive an increase in gross credit from deposit money banks of NGN290bn between end-August and 13 November to NGN19.54trn. The rise amounts to close to NGN4trn since May '19. The additional lending has mostly benefited job and wealth creating sectors. Without the CBN's tougher stance and its measures to enforce compliance, there is little doubt in our view that the increase would have been substantially lower.

The CBN's role in development finance is as popular as ever with committee members. One insists that its interventions halved the rate of contraction of both construction and manufacturing in Q3 '20, and a second that they will help to drive a turnaround in the economy in H2 '21. They want an expansion of the role, notably for the popular Targeted Credit Facility that is designed for households and MSMEs.

On inflation, we learn that the increase in the average price of farm produce slowed from 1.16% in September to 0.75% in October. The subtext is that food price inflation is driven more by processed than by fresh products. CBN staff forecasts, however, indicate higher core and headline rates in the forthcoming reports for December and January.

We take issue with the statement of one member that the strength of the local stock market is a mark of investor trust in monetary and fiscal policy. Rather, the driver has been changes to the asset allocation of domestic institutions, which in turn are the consequence of the crashing of fixed income yields.

There is more discussion of fx policy than usual, which is the result of the then widening gap between the rates at the Investors' and Exporters' window, and at the bureaux de change. Two members suggest that the policy focus could be shifted from the management of demand for fx to the location of new sources of supply.