Monday, May 20, 2019 / 09:07AM / By FBNQuest Research
The monetary policy committee (MPC) holds its latest meeting today and tomorrow in Abuja. In March it surprised with a 50bps cut in the policy rate to 13.50%, its first change in stance since July 2016. The committee adopted this “pro-growth” position because in its words exchange-rate and relative price stability had been achieved. This logic continues to hold, pointing to further cuts ahead, subject to maintaining a rate comfortably above prevailing inflation. We note that nine of the eleven members in March voted for easing (from 25bps through to 100bps).
Headline inflation did pick up by 12bps in April to 11.37% y/y. While this level is above the informal reference range of between 6% and 9%, the increase was driven by higher food prices. Core inflation, over which monetary policy has influence, slowed in April to 9.28% y/y.
The CBN has a headline figure for credit to the private sector of N23.96trn at end-March, representing a rise of 5.5% since end-December yet a level of financial intermediation well below Nigeria’s emerging/frontier market peers.
Now that the Senate has confirmed a second five-year term for the governor, Godwin Emefiele, we would expect an acceleration in the many development finance initiatives from the CBN that we saw in his first. If we follow the logic in the MPC’s communique from March, we also see grounds for further easing. (The extent of the passthrough from a policy rate change to real economy lending rates is debatable although we should note that some committee members are aware of its limitations.)
The global landscape has arguably improved since March from a CBN/MPC perspective. Not only has US monetary policy normalization stalled but there is now a body of analysts which sees the next move by the Fed as a rate cut.
The committee’s “pro-growth” thinking becomes redundant if Nigeria’s external balance sheet (official reserves and balance-of-payments, principally) is subjected to pressure from a reversal in the oil price and/or a flight of foreign portfolio investors in large numbers. Neither risk features in our current central scenario. The geopolitical factors that underpin the oil price of about US$70/b are unlikely to evaporate in our view: rather, there is a danger that they will increase.
The MPC’s own logic indicates further easing ahead. We suspect that this week the committee, reflecting its innate caution, will leave its policy rate on hold to assess the impact of the cut it made in March.
Finally, it is often said that a cut in the cash reserve requirement (CRR) ratio would have a greater impact on lending volumes than a policy rate reduction. However, the CBN is not convinced that the banks would deploy the additional funds to boosting their own loan books. This probably explains why only one MPC member voted in March for a CRR reduction (of 100bps).