The Rationale for No Change in the MPC's Stance


Monday, July 26, 2021 / 08:40 AM / by FBNQuest Research / Header Image Credit: Propcasualty


Elsewhere in the EM universe, there have been several cases of monetary tightening in response to inflationary pressures. The authorities in Brazil, Russia, Turkey, and most recently, Ukraine have hiked rates. In South Africa last week, they left the benchmark repo rate unchanged at 3.50% and noted that inflation remained comfortably within its formal target range. We expect a similar stance from our own monetary policy committee (MPC), which meets today and tomorrow in Abuja, although it is only guided by an informal reference range for inflation. 


In our commentary on MPC members' latest personal statements (Good Morning Nigeria, 12 July 2021), we noted that they had stumbled upon what we termed a winning formula: growth was recovering and the rate of inflation was slowing when they last met in May, which helped to guide the unanimous vote for no change in the policy rate of 11.50% or other parameters.


We would add that, when the committee last met, it had just one month's data point to support its story for inflation. Two more monthly reports (for May and June) have since reinforced the narrative of slowing inflation.


The monthly declines in the y/y headline rate have been modest. Base effects are now positive and should become more pronounced from September through to the end of the year. Our take is a rate of 16.0% y/y in December, which would still be well outside the reference range of between 6.0% and 9.0% y/y.


Our assumption is that the CBN will not make a "big bang" fx adjustment because it would be out of character. We also feel that the FGN is not in a hurry to revisit the removal of retail petrol subsidies, given the latest leg-up in both unemployment and poverty due to the pandemic.


In the view of the committee the downward trend is also supported by the CBN's development finance and the FGN's own programmes in response to COVID-19, which have together boosted the supply of manufacturing and agricultural goods in the country. (The positive impact has been blunted by the growing incidence of insecurity.)


There is the additional argument, cited selectively by committee members, that the drivers of inflation are mostly supply-side or, to use their own terminology, "legacy structural factors". These factors are not directly influenced by monetary policy.


This argument, although broadly valid, has not prevented previous rate hikes. The CBN still has a core remit to achieve and maintain price stability, and cannot ignore it.


The committee is meeting against a more favourable global backdrop than two months ago. The IMF's World Economic Outlook in April forecast global growth this year of 6.0%. An update is due for release tomorrow (Tuesday) and may well bring a small upward revision.


From the Nigerian perspective the positives are: the low interest rates in advanced economies, notably the US, although some analysts see a second "taper tantrum" sooner than the Federal Reserve indicates a change in stance; the firmness of the oil price; and the apparent resolution of the differences between Saudi and the UAE.


In conclusion, we feel that the decision this week will again be no change in stance. It may not be unanimous this time because some members may argue that the CBN's remit on inflation requires a textbook hike. At this stage, we still see modest tightening of 50bps before end-year with a repeat in 2022 on the same scale on the same grounds.

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