NSR Q4 2017 (8) - Is MPC at a turning point?

Friday, October 13, 2017 08:28 AM / ARM Research 

The MPC has achieved something impressive. It now has markets speculating on its language rather than on actual policy changes. This means that its forward guidance is working. So, turning to its language, the communique from the latest monetary policy meeting showed that there was an agreement on the fragility of growth and expected moderation in inflation, though the call for caution still echoes. We expect the MPC to upgrade its assessment of risks in its next meeting, which should guide to an imminent change in policy.

The talk in markets is that a near-term cut in interest rate is back on the cards. Recent cessation of the one-year OMO paper and gradual reduction in clearing rates at OMO auctions suggest that the CBN is edging closer to an inflection point policy wise if one goes by historical patterns. For evidence, we note the recent action by the CBN in money markets, which saw it allow liquidity build up into massive demand at the primary market with the eventual impact driving rates lower at primary market auctions.

In addition to this, CBN’s cessation of one-year bills at its OMO auctions also explained the current yield trajectory at the treasury end with longer term rates dropping faster than that of shorter-term instruments. We look again at key drivers to delineate our outlook for domestic monetary policy.

Sharper moderation in Inflation expected beyond 2017.

We expect to end the year at 15.8%, resulting in a 2017 average of 16.7% YoY. Further, we see pressures gradually falling apart in 2018 as high base effect and lack of material price shock take out the steam from current price momentum. For us, headline inflation should average 12.6% over H1 18. These figures suggest that the CBN will gradually phase out its liquidity sapping programme with the need to support the fragile economic growth set to provide more backing.

In the near term though, with mean 2017 inflation still materially above CBN target 11% and the MPR, the argument of trying to ensure positive real returns on investments is likely to remain in support of CBN’s ongoing monetary policy tightening.

External liquidity position stabilized.

In Q2 17, Nigeria retained its net creditor status in relation to the rest of world after posting current account (CA) surplus of $1.4 billion. However, the reading implied a second consecutive quarterly decline in CA balance after the nation recorded $2.7 billion and $3.3 billion in Q1 17 and Q4 16 respectively.

Going forward, overlaying the implied goods trade surplus with target services and income deficits of $3.6 billion and $3.2 billion as well as net current transfers of $6.2 billion, we expect the country’s current account to print at $1.36 billion (Q4 17: $1.1 billion) and 1.3% of GDP in Q3 17 (Q4 17: 1.1%), with a sustained surplus in 2018.

Fragile growth outlook.

Non-oil GDP growth disappointed as the Q2 17 reading (0.4% YoY) signaled a slowdown from Q1 17 levels (+0.72% YoY) following contractions in Services and Trade. The pattern in non-oil, owing to a slack in ICT (12% of GDP) and impact of credit tightening on Trade (17% of GDP), suggests that the pace of economic recovery is likely to remain soft over the rest of 2017 and even going into 2018.

Balance of factors guides to an accommodative stance in H1 18.

On balance, juxtaposing the fragile growth picture with expected downtrend in inflation and improved FX picture because of rising dollar inflows with a subsisting CA surplus, we see more scope for the apex bank to ease gradually to support the slow pace of economic recovery.

In the interim (Q4 17 and Q1 18), we expect the CBN to assume a less aggressive stance at its weekly OMO auctions leading to lower rates on government securities. Farther out, we forecast a cut in monetary policy rate (MPR) from Q2 18 and expect the MPR to be at 12% by year-end 2018.

 


From ARM’s H2 2017 Nigeria Strategy Report 

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