Monetary Policy Committee Decision Preview: MPC Expected to Retain Policy Parameters - Access Bank


Tuesday November 24, 2020 / 10:26 AM / by Access Bank Economic Intelligence Group / Header Image Credit: Financial Times 

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The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) will hold its last meeting of 2020 on 23rd and 24th November to review outcomes of its previous policy decisions and recent developments. As usual, the MPC will consider domestic and international economic and financial market conditions, with emphasis on information that has emerged since the September 21st and 22nd meeting especially in the context of the raging effect of the COVID-19 pandemic and current developments from the global and domestic economy.


Global Developments

According to the recently published World Economic Outlook (WEO) by the International Monetary Fund (IMF), the global economy is projected to contract by 4.4% in 2020, an upward revision of 0.8% compared to its June update. This upgrade owes to somewhat less dire outcomes in the second quarter, as well as signs of a stronger recovery in the third quarter, offset partly by downgrades in some emerging and developing economies. In 2021, growth is projected to rebound to 5.2%, -0.2% below the IMF June projection.


The World Trade Organization (WTO) in its latest quarterly Goods Trade Barometer reading on 19 August 2020 show a continued drop in goods trade associated with the COVID-19 pandemic, but hints at the early beginnings of stabilization. The WTO Goods Trade Barometer hit 84.5, the lowest on record since 2007, according to latest reading from the organization. The record low print is down 15.5 points from the index baseline of 100, suggesting below-trend growth. It is also nearly 19 points lower on the year.


Major economies like the UK, the US and Japan amongst others kept key interest rates low and unchanged to support the flow of credit, helping millions of firms to stay in business. The Federal Reserve left the target range for its federal funds rate unchanged at 0-0.25% in September while renewing its pledge to keep it low for as long as necessary and do whatever it can to help the economy recover from the debilitating effects of COVID-19. The Bank of England also left its bank rate at a record low of 0.1% during its November meeting and increased the size of its bond-buying program by a larger-than-expected £150 billion to £875 billion, as the country entered a new COVID-19 lockdown. The Bank of Japan kept its key short-term interest rate at -0.1% and maintained the target for the 10-year Japanese government bond yield at around 0% during its October meeting.


S&P in a recent report says it expects global debt-to-GDP to surge 14% to 265% by year end before easing off as the world slowly recovers toward pre-coronavirus income levels. The report stated that a debt crisis within the next two years is not likely given the expected economic recovery, a vaccine by mid-2021, favorable financing conditions, and sovereign, corporate and household spending and borrowing behaviors Brent crude – the international benchmark for oil prices – tapered $1.98, or 4.84%, to $38.97 per barrel on November 2nd compared to $40.95 at the end of September. Oil prices dropped as investors were doubtful of a recovery in global fuel demand following a resurgence of COVID-19 cases in the US and across Europe. Sentiments were also dragged down by news that British energy giant BP will shut its Australia's 65-year old refinery in Perth.


Domestic Developments

On the domestic scene, CBN's deliberation will focus on several variables, namely:


Money Market Rates: The debt market was liquid in October and early November compared to figures at the end of September. The inflows from coupon payments of the Debt Management Office (DMO) and Open Market Operations (OMO) led to the decline in rates. The average 90-day NIBOR closed lower by 0.67 percentage points to settle at 1.3% mid-November from end-September figure. The CBN will likely maintain its benchmark interest rate to keep money market trending at current rates to signal its support of lower rates. This move will likely drive lending to the real sectors of the economy as several businesses were affected by the recent curfew and lootings that occurred during the protest across many states in Nigeria.


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Exchange Rate: The local unit varied across major FX market segments. Data from the Financial Markets Dealers Quotation (FMDQ) showed that the local currency at the Nigerian Autonomous Foreign Exchange (NAFEX)appreciated. Naira at this market segment closed at N385.70/US$ on November 17th compared to N388.8/US$ at the of September. The official rate remained stable at N379/US$. The naira depreciated at the parallel market segment following dollar shortages as demand by manufacturers and traders increased. This is despite the allocation of about $1 billion to Bureau De Change (BDC) Operators since September by the CBN. Consequently, the parallel market rate depreciated settling at $478/US$ on November 17th from $465/US$ at end-September, a loss of N13. We expect the Monetary Policy Committee to maintain the current FX configuration in light of the FX policy measures implemented such as the resumption of BDCs, destination payment for all forms M, letters of credit and other forms of payment such as Business Travel Allowance (BTA) and Personal Travel Allowance.


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Equity market: The Nigerian stock exchange continued the bullish run in October and early November, as indicators were positive compared to market performance at the end of September. The performance was supported by domestic investors seeking profitable returns in this market space given the lack of alternative investment opportunities elsewhere and depressed rates at the treasury bills market. Nigerian firms also reported better-than-expected third quarter corporate earnings which helped to ease concerns over the COVID-19 crisis. Market capitalization of listed equity jumped 29.06% to N18.10 trillion on November 19th from N14.02 trillion at the end of September. Over the same period, the All-Share Index (ASI) gained 3,647.63 points, representing a rise of 29.11%, to close at 34,644.65 points. Domestic equities market might be volatile as investors remain wary of the economy going into a recession and the fear of the second wave of the COVID-19.


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Fiscal Policy: The President of Nigeria recently presented to the National Assembly a N13.08 trillion budget estimate for 2021 with N3.12 trillion (23.85%) reserved for debt servicing. The budget reading which hinted that the nation's economy might relapse into recession, stated that N3.85 trillion (29.43%) was voted for capital projects, while personnel costs (salaries and allowances) would amount to N3.76 trillion (28.75%). With 23.85% allocated for debt servicing and personnel costs gulping 28.75%, it means 52.60% of the budget or N6.88 trillion will be spent on both items next year.


Giving other highlights of the appropriation bill, the budget was set on some benchmarks such as daily crude oil production of 1.86 million barrels per day and oil price of $40 per barrel. The President, who tagged the proposed fiscal document, 'Budget of Economic Recovery and Resilience', assured Nigerians that his regime would do everything possible to take the economy out of recession in 2021. The budget is the focal point for all economic activities in the country and the 2021 budget might be a little too ambitious given the historic trend of previous budget performances.


Revenue projections which are funded from oil revenues and non-oil revenues are higher than previous budgets which were also not met. With the stricter enforcement of oil cuts from OPEC and volatile oil prices, the budget is unlikely to meet projected revenues. The MPC is likely to advise the fiscal authorities to ensure the speedy passage and implementation of the budget to support the quick recovery of the economy.


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External Reserves: The stock of external reserves stood at $35.53 billion as at November 17th, a slight decline from its closing figure of $35.74 billion at the end of September 2020. The reserves have declined marginally as the central bank continues to sustain FX stability by providing dollars for BDCs. Bonny light, Nigeria's benchmark, gained $3.03 to $44.39 per barrel on November 18th from $41.36 at the end-September amid hopes that OPEC+ will delay a planned easing of production cuts from the start of next year. Algeria's energy minister said that OPEC+ could extend current production cuts of 7.7 million barrels per day into 2021 or deepen them further if needed. We expect the MPC to leave its key policy rate steady to support price stability as it pertains to exchange rate.


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GDP: Data from the National Bureau of Statistics (NBS) revealed that the Nigerian economy contracted by 6.1% year-on-year (y-o-y) in Q2 2020, from 1.87% and 2.55% in Q1 2020 and Q4 2019, respectively. This marks the end of the country's slow but positive growth since the 2016/2017 recession. This performance revealed the extent of damage caused by the coronavirus pandemic. The contraction is largely attributed to significantly lower levels of both domestic and international economic activities during the quarter, which resulted from nationwide shutdown efforts aimed at containing the pandemic. In Q2 2020, only 13 sectoral activities recorded positive real growth compared to 30 in the preceding quarter. Real growth of the oil sector was -6.63% (year-on-year) in Q2 2020 indicating a decrease of -13.80% points relative to Q2 2019. Growth decreased by –11.69% points when compared to Q1 2020 which recorded 5.06%.


The non-oil sector declined by -6.05% in real terms during the reference quarter (Q2 2020). It is the first decline in real non-oil GDP growth rate since Q3 2017. Sectors such as transport and storage, accommodation and food services, construction, education, real estate and trade experienced the highest negative growth in the reference quarter. The Nigerian economy is expected to contract again in Q3. Given the foregoing, the rate-setting committee would likely keep rates unchanged in a bid to foster economic growth.


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Inflation: Nigeria's annual inflation rate climbed for the 14th straight month in October according to data reported by the National Bureau of Statistics. The annual inflation rate jumped to 14.23% in October 2020 from 13.71% in September. It is the highest inflation rate in 33 months amidst widespread increases in prices due to ongoing border closure and disruptions to supply chains stemming from the pandemic. The main upward pressure came from food prices. Food inflation ascended to 17.38% in October from 16.6% in September while core inflation, which excludes farm produce, hit 11.14% in October from 10.58% in September. Given rising prices, mainly driven by food inflation, the MPC is unlikely to alter the benchmark rate to tackle inflation


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Our Position

Taking account of all these considerations, we expect the MPC to reach the following decisions at the conclusion of its


  • Retain MPR at 11.5%, leaving the asymmetric corridor of +100 basis points and -700 basis points unchanged: Given recent upheaval in the country due to lootings during the protest, the recent cut during the last CBN monetary policy meeting and the stable monetary policy rate in the US and UK, we expect the CBN to maintain a neutral monetary policy stance as it waits for the effect of the recent cut in the MPR rate to make adequate impact in the economy.
  • Retain the Cash Reserve Requirement (CRR) at 27.5%.
  • Retain Liquidity Ratio at 30%.
  • Exchange Rate: We anticipate no change in the FX policy stance by the CBN.

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