MPC may tighten to avoid prolonged negative real return


Monday, April 18, 2016 2.22PM / Cordros Capital

With the record high March inflation still in the burner, and April reading unlikely to offer any respite, investors would have to remain in uncertainty till May when the Monetary Policy Committee (MPC) meets again to decide the next line of policy response.

Last month, the surprising spike in February's headline inflation climbing 176bps, and even rising above the benchmark rate, forced the Committee into reversing policy stance. We view the primary reason (that rates were tightened to directly stabilize speculative pressure on the NGN and indirectly ease inflationary pressure) the MPC offered to market observers for its action as cosmetic. Rather, what we think was substantive was the Committee's anticipation of further uptick in March inflation and the need to act, to prevent a prolonged situation of negative real interest rates.

Furthermore, the latest (March) inflation report, which was also surprisingly high (100bps above Bloomberg consensus), no doubt, comes as an additional pressure to the Committee and should serve as a test to the rationale behind last month's policy decision.

At its current level, the monetary policy rate is already in isolation from headline inflation, and given the likelihood for further uptick in inflation (thus extending real interest rates deeper into negative territory); we expect the Committee tightening once again, to maintain the rationale of the recent hawkish episode.

Given the state of Nigeria's economy (wherein virtually all economic performance indicators point southward), last month, the MPC appeared to concede that its approach to growth stimulation was largely ineffective.

Although risk to the necessary fiscal support increases with each passing delay of the budget passage, chances that the Committee would introduce a policy in favour of growth in May is highly limited.

While controversy over the State budget lingers, President Buhari, alongside Governor Emefiele, was in China this week to discuss bilateral trade agreements. With insight into the trade agreements limited by details, making headlines are (1) a US$6 billion infrastructure loan extended by the Chinese government (2) a bilateral currency swap deal; and (3) the substitution of yuan renminbi in Nigeria's forex reserves mix.

Having the yuan mixed in the domestic forex reserves was an option former CBN Governor Sanusi thought plausible in 2011, but for some unclear reasons -- possibly because crude oil price was still in the comfort zone -- it never made it to the Chinese government house.

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