A Compelling Case for Another Hold from the MPC


Monday, January 25, 2021 / 08:50 AM / By FBNQuest Research / Header Image Credit: CBN

Proshare Nigeria Pvt. Ltd.

Today the monetary policy committee (MPC) opens its latest meeting. It created two shocks last year with policy rate cuts of 100bps in both May and September. They may have been warranted in view of the economic slowdown (although its origins have been the external shock of the Covid-19 virus) but sit uncomfortably with the steady rise in inflation since August '19. The headline measure has now accelerated y/y for 16 months in succession, to 15.75% in December. Easing in the MPC's own words helps to create excess liquidity and adds to inflationary pressures. A third cut this week is therefore highly unlikely, particularly when we recall the CBN's mission to achieve and maintain price stability. We feel therefore that the committee this week will again opt for 'hold' and 'wait and see' with an unchanged policy rate of 11.50%.


The CBN has not adopted formal inflation targeting but operates a reference range of between 6.00% and 9.00% y/y for the headline measure. This has not been attained since April '15 and, even if we were to apply the range to the core (non-food) measure, not since October '19. It is no surprise that the committee has not mentioned the elusive range for many months.


Food price inflation is now approaching 20% y/y, and there is worse to come. The drivers are supply-side and are a combination of the old (poor roads, and insecurity in growing areas) and the relatively new (rises in the retail price of gasoline and the protests in October).


We understand that the CBN's house forecasts see another rise for the headline measure in the January report from the National Bureau of Statistics. We see a peak a little later, in March at 16.69%. The communique this week may well share revisions to the CBN's house forecasts. 


There is a plausible counter-argument that the acceleration in inflation is the consequence of factors beyond the influence of monetary policy. The MPC itself sometimes makes this point and we have a lot of sympathy with it. Yet we cannot forget the reference range or overlook the CBN's mission.


In the EM universe a good number of official rate-setting bodies cut rates in response to the virus in 2020, supporting a fiscal stimulus in many cases. They also wanted to be seen to be responding, which was probably true of the MPC, too.


On past form, the committee will provide updates on the financial health of deposit money banks (DMBs), and the CBN's expanding development finance role. By its circular dated 01 December, the CBN announced the creation of special bills as additional tools for liquidity management. It is too early to say whether the measure has had the desired effect of boosting DMBs' lending, and thereby reinforcing the progress achieved by the CBN's tightening of the loans-to-deposit ratio since May '19. 


We do not expect much commentary on the fx regime in the communique. This is CBN territory (although the top ranks of the CBN are represented on the committee). If there was to be a change in direction, which is not our view, the MPC would not be the messenger.


The communique in November noted that the orthodox response to rising inflation would have been to tighten. However, the committee declined to raise its policy rate, it added, because of the negative impact on any recovery in output and on the CBN's agenda of encouraging credit expansion at affordable rates. Both arguments remain potent in our view.


It would be very difficult for the committee to ignore the inflation numbers, which is our principal reason for calling a verdict of 'no change'. If we have an extended period of disinflation, we could still get a rate cut later this year.


Proshare Nigeria Pvt. Ltd.

Related News

  1. Pre-MPC January 2021: MPC to Maintain Policy Rates
  2. Monetary and Interest Rate Policy in 2021: Going for Growth
  3. CBN to Sustain Expansionary Monetary Policy Till Q1, 2021 - Cordros Securities
  4. Ten MPC Members, One Shared Outlook
  5. Further Slowdown in PSCE Growth in November 2020
  6. Personal Statements By The MPC Members At The 133 MPC Meeting of Nov 23-24, 2020
  7. CBN Rolls the Dice to Tackle Market Liquidity and Dollar Dearth
  8. Implications of CBN's Introduction of Its Special Bills to the Market
  9. CBN Introduces Special Bills to Deepen the Financial Markets, An Additional Liquidity Mgmt Tool
  10. Faltering Increases in Private Sector Credit Expansion
  11. Post-November 2020 MPC View: Back to the Committee's Favoured Stance
  12. CBN Communique No. 133 of the MPC Meeting - Nov 23-24, 2020
  13. As Expected, MPC Retains All Key Parameters At The End of November 2020 Meeting
  14. Monetary Policy Committee Decision Preview: MPC Expected to Retain Policy Parameters - Access Bank
  15. A Pause to Reflect from the MPC
  16. LDR Policy: Over One Year After, Where Are We?
  17. Monetary Policy Response in Emerging Market Economies: Why Was it Different this Time?
  18. Endorsement of the CBN's Development Finance
  19. Slowdown in the Expansion of PSCE
  20. Personal Statements By The MPC Members At The 132 MPC Meeting of Sep 21-22, 2020
  21. MPC Surprise Rate Cut: Limited Impact on Credit Growth


Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

Related News