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MPC Unlikely to Make Any Change

Proshare

Tuesday, November 22, 2016 8:54/ AM /fdc

The Monetary Policy Committee (MPC) is scheduled to meet on November 21/22, at a time of deteriorating economic fundamentals – contracting output, a weakening currency, high inflation and increasing unemployment.

With Q3 GDP growth showing a further contraction to –2.24%, Nigeria is grappling with its worst economic crisis since 1986. Cumulatively, Nigeria’s GDP growth rate is –1.55%.

The International Monetary Fund (IMF) in its recently released World Economic Outlook (WEO) for October projects a full year contraction of 1.7% in 2016.

The Economist Intelligence Unit (EIU) has also revised downwards its 2016 GDP forecast for Nigeria to -0.8% from 0.4%. The World Bank is more optimistic with a growth forecast of 0.8% in 2016.

Policy Divergence Lingers
The MPC is also meeting in a period of increasing conflict between monetary and fiscal policy makers. In theory, the two sides of the policy coin are expected to be complementary to achieve sustain-able growth and price stability.

However this is not the case at this time. On the political front, the president is also under immense pressure to reconcile divergent interests within his party, government, legislature and even the judiciary.

Sequence and Prescriptions for Monetary Stability in a Recessionary Environment
The CBN and monetarists are of the view that a forex supply gap is the fundamental reason for imported inflation. Also, the pass through effect of exchange rate weakness into prices is the main culprit.

Their strategy is to achieve exchange rate stability and this has been done by sterilizing large chunks of naira, pushing up interest rates in the Treasury Bills market, restricting demand (with the 41 items and other capital controls) and achieving an IFEM rate that is acceptable (anything between N305-N320).

Therefore, if the exchange rate crisis is contained, inflation is curbed, economic activities pick up and new investments begin to trickle in. They are of the view that monetary policy can achieve stability during a recession. It is difficult to assess this because oil revenues have increased as a result of improved production.

The fiscalists on the other hand, have a 3-point agenda: economic recovery and growth plan, the borrowing program and the budget. However, there is significant pushback from the National Assembly which is stalling the achievement of these plans.

However, the primary objective of monetary policy is price stability not stimulating the economy out of a recession. Monetary pol-icy stance has remained contractionary.

From daily interventions, to restrictions on use of naira cards abroad, it appears there is increased regulation leading towards exchange control. The signals sent are also bound to increase uncertainty and fear in the market which could lead to further volatility in the value of the naira.

Regional Considerations
In Sub-Saharan Africa, key economies reported a decline in their inflation numbers, with the exception of Angola, Kenya, Nigeria and South Africa where inflation increased.

With respect to monetary policy, all the economies under review held the monetary policy rate unchanged at their last Monetary Policy Committee meeting, except Kenya and Ghana which cut by 50bps each.



Likely Outcomes
We have two active and one passive scenario of the likely out-comes of the meeting. Our projection is that the MPC would main-tain the status quo while leaning towards a more accommodative stance.

Scenario A – 90%: Maintain status quo with a leaning towards an accommodative stance

·         MPR: 14% p.a.

·         Reduce CRR from 22.5% to 20.5%, targeted only at loans to the real sector

·         Gradual slide in treasury bills rates


The rationale for this is to stimulate economic activity and com-plement fiscal policy. By reducing the CRR, the CBN is effectively easing monetary conditions that have deprived the economy of funding.

The impact of this decision is positive for growth and employ-ment and the medium – long term inflationary pressure will be dampened by the expected increase in output.

Scenario B – 10%: Reduction of Interest rates

·         MPR: from 14% p.a. to 12% p.a.

·         CRR: from 22.5% to 20.5%


The rationale is to inject liquidity into the system because of growth pressures. This would have a positive impact on the bank-ing sector and the markets as it is expected to encourage lending to the real sector.

Scenario C– 0%: Increase interest rates

·         MPR: from 14% p.a. to 15% pa

·         CRR: from 22.5% to 24%


The rationale would be to curb inflation which is projected at 20% by year-end and support the exchange rate. Higher interest rates are expected to deter credit demand and heighten the liquidity crunch in the banking system. This is an unlikely scenario and therefore has a 0% probability of occurrence.

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