Wednesday, December 17, 2014 9:35 AM / FBN Capital Research
Members of the monetary policy committee (MPC) do not expect a marked recovery in the oil price to ease what we term Nigeria’s macro worries, and have doubts as to whether the strong medicine they prescribed after their last meeting on 24 and 25 November will cure the patient.
This is our take on their latest personal statements, which the CBN has this week published.
On the oil price, one member argued that the latest slide was different to that in 2008 because it was driven by a technological advance (in US shale production). Another cited a report on the wires that 80% of such production is commercially viable at US$48/b. Such estimates vary greatly (Good Morning Nigeria, 15 December 2014).
An argument put by all members was that the committee had to tighten its stance (and devalue, too) to confront speculative activities by the banks. The excessive liquidity in the system had become such that on some days N800bn was placed with the CBN under its standing deposit facility.
Several members said that the committee had held off action after the previous meeting because it wanted to give the banks some breathing space from cost pressures. Since the banks had since appeared more drawn to exploiting arbitrage opportunities in the fx market and placing funds with the CBN (than boosting their loan books), the committee had no qualms about acting this time around.
Members had varying degrees of confidence that the devaluation would suffice.
We do not think they could have gone further than setting a new midpoint with the upper end of its enlarged corridor at the then interbank rate. To do otherwise would have been to send a curious signal.
Most members felt that the policy rate increase would help to lock in the offshore portfolio investor. In our view, that community is not yet comfortable that the oil price is approaching its floor.
Tightening was also intended to combat inflationary pressures. Current staff projections have the headline rate in single digits through to March 2015, and touching 10.0% y/y the following month.
One member saw competitive gains for Nigerian exports from the decline in the naira exchange rate. This would only apply to products (unlike oil) with sizeable local currency inputs such as labour.