Little to Warrant Any Change from the MPC

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The monetary policy committee (MPC) opens its latest meeting in Abuja today, and is due to announce its decisions tomorrow afternoon. At its meeting in September it voted by six votes to one for no change in stance. Little has changed to warrant any other conclusion this week. The policy rate has been held at 14.00% since mid-2016, and we expect the same on a majority vote. We are disappointed that the CBN has not yet released members’ personal statements from September.

If those statements historically do show a common thread, it is the determination to fight inflation. The headline rate continues to fall at a slow pace, to 15.9% y/y and 0.8% m/m in October. The cumulative decline amounts to 283bps since January y/y, and 111bps since May m/m.

The stability of the fx rate in the various windows in recent months has clearly been a positive. If this is maintained, which is our expectation, we should see sharper falls in the headline rate y/y in H1 2018 as strong m/m increases from February to June this year drop out of the calculation. The monetary authorities could then return to the path of easing.

The committee likes to say that supply-side constraints are responsible for the pick-up in inflation and the (now-ended) recession. It could have added the CBN’s previous fx policies to its analysis. The culprit in the bigger picture is the slide in the oil price since mid-2014, which has exposed Nigeria’s macroeconomic frailties. The blame in this case cannot be laid at the door of the CBN or the MPC.

The MPC’s ability to encourage growth is constrained by the “disconnect” between its benchmark rate and those for the real economy, as well as by the high concentration of banks’ loan books both sectorally and in terms of company size. In contrast, fiscal policy has greater capacity to encourage growth.

Without wanting to suggest that the committee has been emasculated, easing by the MPC does not automatically benefit borrowers in the real economy. (When it hikes, the story is different.) Turning to FGN borrowing, there has been a welcome fall in yields but driven by CBN guidance rather than action by the MPC. At last week’s auction of NTBs, the yield on the 364-bill was 400bps lower than at end-August. The fall came largely at one auction (04 October), and rates have since stabilised.

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